When I wrote ETF Trading Strategies Revealed in 2006 exchange-traded funds (ETFs) were gaining popularity but still weren’t well known. I wrote that in time ETFs would be as commonly known to people as mutual funds. That is no longer a hot take. Back then, there were about 200 ETFs with assets of around $300 billion. Now there are over 4000 ETFs with assets of $15 trillion!
The growth in ETFs is impressive but there are too many choices. Previously, ETFs allowed investors to gain exposure to particular areas of the market while keeping expenses to a minimum. There were large-cap and small-cap funds as well as individual sectors like Pharmaceuticals and Aerospace & Defense.
But new ETFs keep appearing that cover small segments of the market to the point of absurdity. Consider the Nicholas Bitcoin and Treasuries AfterDark ETF, which gives you exposure to bitcoin’s price action, but only when the stock market is closed. There’s the VistaShares Target 15 TEPRTantrum Contrarian Distribution ETF, which holds and writes options on the top-20 holdings in David Tepper’s hedge fund.
Other trends include ETFs that hold a single stock. Actually, they use derivatives to gain leveraged or inverse returns on that stock. It allows investors to buy a stock using leverage without doing any borrowing or bet against a stock without actually going short. Leverage on individual stocks? What could go wrong?
There is a daily reset on leverage so they perform as advertised for day traders, but if you want to leverage a trend over weeks or months then anything can happen. For example, Tesla was unchanged from January 9 through May 13. Over the same period, the Direxion Daily TSLA Bull 2X ETF, which has daily moves of double that of Tesla’s stock, lost 9 percent.
Originally, almost all ETFs were passively managed so their management fees were very low. The Vanguard S&P 500 expense ratio is a ridiculously low 0.03% of assets. Today, new ETFs have an average fee of 0.69% and a fifth charge at least 1% annually. Call me old fashioned but I’ll stick to the low-cost passive ETFs.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
