To Tame Portfolio Upside, Consider Some Trendy New ETFs…
December 20, 2007
The Wall Street Journal’s personal finance guru Jonathan Clements is keen on some of the new fangled ETFs mutual fund companies are churning out by the fistful:
Wall Street has rolled out some 600 exchange-traded index funds, those stock-market-listed products that have exploded in popularity. Many, however, merely mimic existing mutual funds -- or are so narrowly focused that they're of little use to prudent investors.
But lately, all that's changed. ETF sponsors have launched intriguing funds in four key sectors, offering ordinary investors some great new ways to diversify"
The article notes the fabulous diversification offered by new ETFs investing in foreign real estate, international small caps, commodities, and foreign bonds:
International Bonds
SPDR Lehman International Treasury Bond (BWX)
Adding these funds will add diversity: your boring U.S. stock, bond, and money market funds will go up in coming years while the new ETFs will go down. That’s diversity we can do without.
The mutual fund industrial complex generally only launches new funds when there is excess demand for that type of fund in the marketplace. Every single one of these categories of funds would have been perfect to add to a U.S. stock heavy portfolio seven years ago. Today, after huge run-ups and inflows of money, these categories of funds will perform poorly in coming years – check out our MAXrating category ratings for these and similar funds. The poor ratings result from outperformance and money inflows.
While it is true that these types of funds are less correlated to U.S. stocks, that doesn’t mean buying a low correlation asset after it has run up is a smart move for your portfolio.
While we have nothing against relatively low fee funds offering access to undiscovered nooks and crannies of the global markets, an investor could have added these “four key sectors” to their portfolio with any number of regular old open end mutual funds years ago. The fact that they didn’t want to is why we didn’t see a slew of new funds in these categories in the early 2000s (though we did see quite a few new tech funds…).
American Century Global Natural Resources was closed and liquidated while we owned it because nobody wanted to buy a global commodity fund. Now many of the largest ETFs and mutual funds invest in commodities. The same can be said for an old Vanguard Utility fund, which was killed right before a major move up in utilities.
We no longer own any of these funds in our Powerfund Portfolios and are selling our old fashioned foreign bond fund in December. This WSJ article and these new funds are the reasons we are comfortable giving up this diversity for the time being. As die-hard contrarian investors, we’ll be back when some of these funds are shut down.
The Wall Street Journal’s personal finance guru Jonathan Clements is keen on some of the new fangled ETFs mutual fund companies are churning out by the fistful:
Wall Street has rolled out some 600 exchange-traded index funds, those stock-market-listed products that have exploded in popularity. Many, however, merely mimic existing mutual funds -- or are so narrowly focused that they're of little use to prudent investors.
But lately, all that's changed. ETF sponsors have launched intriguing funds in four key sectors, offering ordinary investors some great new ways to diversify"
The article notes the fabulous diversification offered by new ETFs investing in foreign real estate, international small caps, commodities, and foreign bonds:
Foreign Real Estate
iShares S&P World ex-U.S. Property (WPS)
SPDR DJ Wilshire International Real Estate (RWX)
WisdomTree International Real Estate (DRW)
International Small Caps
iShares MSCI EAFE Small Cap (SCZ)
SPDR S&P International Small Cap (GWX)
WisdomTree International SmallCap Dividend (DLS)
Commodities
Shares S&P GSCI Commodity (GSG)
PowerShares DB Commodity (DBC)
iPath Dow Jones-AIG Commodity (DJP)
iPath S&P GSCI Total Return (GSP)
International Bonds
SPDR Lehman International Treasury Bond (BWX)
Adding these funds will add diversity: your boring U.S. stock, bond, and money market funds will go up in coming years while the new ETFs will go down. That’s diversity we can do without.
The mutual fund industrial complex generally only launches new funds when there is excess demand for that type of fund in the marketplace. Every single one of these categories of funds would have been perfect to add to a U.S. stock heavy portfolio seven years ago. Today, after huge run-ups and inflows of money, these categories of funds will perform poorly in coming years – check out our MAXrating category ratings for these and similar funds. The poor ratings result from outperformance and money inflows.
While it is true that these types of funds are less correlated to U.S. stocks, that doesn’t mean buying a low correlation asset after it has run up is a smart move for your portfolio.
While we have nothing against relatively low fee funds offering access to undiscovered nooks and crannies of the global markets, an investor could have added these “four key sectors” to their portfolio with any number of regular old open end mutual funds years ago. The fact that they didn’t want to is why we didn’t see a slew of new funds in these categories in the early 2000s (though we did see quite a few new tech funds…).
For example, in our Powerfund Portfolios we owned Artisan International Small Company (ARTJX), Forward International Small Company (PISRX), American Century International Bond (BEGBX) and American Century Global Natural Resources (BGRIX) – the latter of which was actually cheaper to own than some of these newfangled and overpriced ETFs. We once owned a real estate fund (SSgA Tuckerman Active REIT) but never owned an international real estate fund (though they do exist, Alpine International Real Estate [EGLRX] started in 1989).
American Century Global Natural Resources was closed and liquidated while we owned it because nobody wanted to buy a global commodity fund. Now many of the largest ETFs and mutual funds invest in commodities. The same can be said for an old Vanguard Utility fund, which was killed right before a major move up in utilities.
We no longer own any of these funds in our Powerfund Portfolios and are selling our old fashioned foreign bond fund in December. This WSJ article and these new funds are the reasons we are comfortable giving up this diversity for the time being. As die-hard contrarian investors, we’ll be back when some of these funds are shut down.
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