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Issue No. 33
Apr. 12, 2016

The ETF Effect

Morningstar (NSDQ: MORN) recently reported that 247 mutual funds suffered outflows of at least 10 percent over the past year, with 18 losing more than 40 percent of their assets under management. Redemptions on this scale usually occur toward the end of a bear market, when many investors throw in the towel.

This hemorrhaging stems from the growing belief that passive investment strategies involving exchange-traded funds (ETF) will outperform an active management over the long haul. Lower fees also help to bolster overall returns.

Of course, ETFs and other products that offer one-stop exposure to a particular sector or theme often weight their positions by market capitalization. Utilities Select Sector SPDR (NYSE: XLU), for example, rebalances its holdings quarterly and exhibits a bias toward stocks that have already run up.

At last check, NextEra Energy (NYSE: NEE), which trades at a record 21 times trailing earnings, accounted for 9 percent of the ETF’s portfolio. And the instant diversification offered by ETFs mean that you’ll always own the good, the bad and the ugly, which dilutes the best performers’ contribution.

But discriminating investors can take advantage of the rise of ETFs.

 

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ABOUT ROGER CONRAD

Roger S. Conrad needs no introduction to individual and professional investors, many of whom have profited from his decades of experience uncovering the best dividend-paying stocks for accumulating sustainable wealth. Roger b