Why You Should Avoid Offbeat ETFs And Stick To Investing Basics
Financial firms have displayed a remarkable capacity over the years to churn out a seemingly endless stream of ETFs and other investments designed to exploit some popular trend or capitalize on a market niche. That may speak well for the industry’s marketing savvy and creativity. But if you’re looking to invest your hard-earned money for retirement or any other reason, I recommend you ignore quirky attention-getting investments and stick to the fundamentals.
I’ve long questioned whether individuals really benefit from the hundreds of specialized ETFs and other niche investments financial firms have concocted over the years. And I’m not alone. Nearly 15 years ago I wrote a story for MONEY Magazine in which index investing pioneer and Vanguard founder John Bogle worried that the industry’s slicing and dicing of broad indexes into ever smaller and specialized slivers was turning the concept of indexing on its head, making it more about speculating which area of the market will outperform than harnessing the power of the broad market in a low-cost efficient way. So having witnessed the introduction of hundreds of, shall we say, unconventional ETFs, I can’t say that I’m shocked, shocked! when another one comes along.
Still, when I first heard about Janus’s new Obesity ETF with its ticker symbol SLIM, my first reaction was that it must be some sort of prank, maybe something the writers from the satirical newspaper The Onion dreamed up. After all, The Onion has been known to poke fun at the world of finance, most notably in what I consider perhaps the greatest investing parody of all time: “Recession-Plagued Nation Demands New Bubble To Invest In.”
But no. Not only was the Obesity ETF an actual investment, it was one of four “thematic” ETFs designed to capitalize on, in Janus’s words, “transformative forces of change that could permanently alter our lives and behaviors, creating unprecedented opportunities.” The Obesity ETF, as its name suggests, is intended to help investors take advantage of a growing obesity epidemic, while the other three—Long-Term Care (OLD); Health and Fitness (FITS) and Organics (ORG)—offer ways to profit respectively from an aging population, a heightened focus on health and fitness and a growing appetite for organic food.
I don’t doubt that these trends—excuse me, “transformative forces of change”—exist. But I do question whether putting your savings into vehicles specifically targeting these, or any other, trends is a smart way for individuals to invest.
Why? Well, for one thing, these themes aren’t exactly new. You can find research discussing a global obesity problem as far back as the early 2000s, if not earlier. The same goes for the aging of the population. And while the fitness and organic crazes may be of somewhat more recent vintage, they’re hardly a secret either. Investors and analysts who focus on the health care, pharmaceutical, leisure, consumer goods, REIT and technology sectors, to name a few, have been following companies large and small, new and old that would benefit from these trends for years, which means such companies’ prospects should already be reflected in their stock prices. So it’s not as if you should expect to score outsize gains because you’re getting the inside dope on major societal transitions that other investors are overlooking.
More importantly, building a portfolio to take advantage of a particular theme or trend runs contrary to the cardinal investing concept of diversification. If anything, focusing on a particular theme virtually assures you’ll own a portfolio concentrated in a few industries and possibly in a relatively small number of stocks. You can end up a winner if your bet on a particular theme pans out (assuming you also own the right stocks to capitalize on that theme). But there’s also the chance you could be sorely disappointed if the trend you’re counting on doesn’t unfold as expected or, for that matter, if other themes you haven’t placed a bet on generate much higher returns.
If, by contrast, you create a well-balanced portfolio that contains a wide spectrum of stocks large and small and growth and value that represent all market sectors around the globe—which you can do by investing in just a few low-cost U.S. and international index funds—you don’t have to predict (or guess) how different themes and stocks will perform. You’ll own companies that will profit from any number of trends and themes, whether you foresee them or not.
In short, it comes down to a simple choice. Do you want to make a bet on a particular vision of the future, or do you want to hedge your bets by building a portfolio that has the potential to perform well over the long-term under a variety of economic and market conditions? The first option may be more exciting. But considering, as the Danish proverb says, that prediction is hazardous, especially about the future, I contend that hedging your bets is the more prudent way to go. (6/22/16)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com. You can tweet Walter at @RealDealRetire.