Intelligent Investors Choices.
Smaller companies are often leaders, innovators, job creators and investor stars. Yet the big boys ignore them an indirectly tell others to do the same.
EFT, so called exchange traded funds, or plain index funds, seem to be taking over the global investment business at an alarming rate. I have written about it here before and it pays to revisit this because it’s an exploding industry and a huge topic usually only addressed by those whom advocate these funds.
Transactions costs on typical ETF funds are a miniscule 0.16 US$, as compared to 0.79$, per US $ invested. In the past 3-5 years their popularity has exploded. Not least due to the great financial recession. Due rightly so to ever more critical masses which are tired of high salary/bonus receiving fund managers -whose performance is not often fairly tied their compensation. The broad fallout of this has been very high growth in ETF investing.
Many investors know ETF’s advantages in not only minimizing transactions costs to the investor, but also because there are now so many to chose from, often all under one mega financial company’s roof. Few know of their hidden disadvantages.
Take for example Vanguard Funds which have thrived in a sour climate for investors ever since 2008. A decade of disappointing stock market returns in the US has fueled their popularity both in the US and then globally. I think Thailand alone now has a dozen ETF, 4 are just for Gold. Vanguard mega ETF mutual fund manager has attracted near 100 Bill $ in deposits for the first 6 months of this year, or an absolute record in its 38 year history. As Vanguard’s CEO Mr. McNabb boasts, “the world is coming around to our way of doing things”.
Is this really mostly the way to do things’, as compared to serious/smart/alert investing? Maybe broadly this is so. But more like its just their advocated way of doing things. Vanguard has over 1.9 trillion US$ under management and is the largest fund operator in the US, this mammoth firm commands 17% of the ETF market and this is up from just 6.1% in 2007, according to monitor “Morningstar”.
This way of doing things is being actively promoted in the US mostly by the vast national pool of financial advisors whose ETF growth rate is 80%, as compared to 3 years ago. Yes, all coming from just this pool of advisors, surely a gigantic increase with no end in sight.
Most financial advisors of all kinds these days (they love the word “independent” meaning showing no biases, when in fact they do bias ETFs), only use ETF’s or other such index funds which just mimic various stock indexes -yet can be traded like stocks.
It seems to be increasingly so the vogue in an environment (at least in the West) where financial advisors just don’t trust their own investor choices anymore and happy to earn many smaller recurrent fees -rather then be truly a wealth creator for their clients. The old way, where their own remuneration/bonus are aligned in the same ways of their clients, has just faded away. And this sure fits into the globe’s mega institutions hands as it promotes their own largesse. It also so just too often simply “passes the buck”. Meaning: neither the financial institution, nor the wealth managers/financial advisers, have any accountability for returns. After all, markets rise and fall along with ETF’s.
The irony in all this is that only half the story is ever explained.
As institutions dominate more and more of stock trading, yes through ETF’s and otherwise, top down investing will only grow to ever more dominating levels.
Top down investing is exactly what ETF strictly do: the larger the market cap of a stock, the more they invest in…along the way the smaller market cap’ choices get totally ignored, regardless of merit. And the more an ETF fund swells in size, the more they invest like that by definition.
Bottom line is that smaller growth companies, many which have very high investor merit, get totally ignored again by definition. This is sort of an avalanche in motion where the monster gets bigger year after year, as the above figures certify. As the world is coming around to “their way of things” will also be a world which sees financial institutions ever dominating on just about anything -and so the best investor bargains increasingly so go begging.
Large companies create very few new jobs:
Who takes on the other side to explain these ETF’s ever increasing market distortions which directly affect the flow/allocation of capital (in this case to nearly nil) to the very smaller companies which create most new jobs and most growth. This o
n top of very often far superb investor returns. All new job growth in the US for example come from smaller companies. Ah, I wonder what would of happened to me if I too, like so many, viewed investing in ETF’s as the viable investor solution.
But I do worry for the financial world -as ever more capital is allocated strictly by size alone and so ignoring the very thing in what makes a country vibrant while creating new jobs.
Best Regards,
Paul A. Renaud.
www.thaistocks.com
PS. Thank you SITHAI (16.80) for the nice 70% return plus dividends, since the visit pictured above.
