Millennials Like ETFs

Vanguard's "How America Invests" offers a look at the behavior of five million households that invest with the firm. As you would expect, investors are moving into index funds and away from actively managed products. Some wealthier Vanguard customers are using exchange traded funds to add diversification, but the real fans of ETFs are the young. 

Most households who currently invest in ETFs are “diversifiers,” meaning ETFs make up less than a quarter of their assets. Their ETF investments are in addition to already-diversified mutual fund portfolios. These households tend to be wealthy and long- tenured. However, there's a small but growing group of ETF “enthusiasts,” typically millennials who have been with Vanguard for only three years, who build complete portfolios from ETFs.

In Deluge of Funds, Investors Sink or Swim

No wonder people find investing bewildering. The mid-year report on mutual funds in The New York Times contains page after page after page – ten pages in all – of mutual fund listings. If printed in type big enough to read, the listings would have covered 12 or 15 pages.

For the would-be investor, this sea of funds must be a daunting sight.

Yet it used to be even scarier. After cresting above 8,000 before the Great Recession, the number of mutual funds has eased off. Jack Bogle estimates that 7 percent of equity mutual funds gave up the ghost each year from 2001 to 1012.

Even so, more than 7,000 mutual funds are still operating.

And that's not all. Joining the thousands of conventional load and no-load funds are about 1,600 exchange-traded products, primarily ETFs.

In part the deluge of funds is an optical illusion. Sizable segments of the mutual fund listings consist of house funds – products intended for customers of a bank, brokerage or insurance company. Other funds may be moribund relics of faded hopes or failed algorithms.

Likewise, most exchange traded funds (or "products," to use the umbrella term) are lucky to get their names in the paper. Of 1,600 funds, a mere 241 hold almost 90 percent of the assets.

Perhaps the deluge of funds indicates the need for investment advisers, although fund-picking is no easier than stock-picking.

Or perhaps the deluge is driving bewildered investors toward online services that offer simple portfolios of a few basic ETFs.

What do you think?

Exchange Traded Funds: Negative Returns?

Carl Richards doesn't think much of exchange traded funds. But his Bucks post sounds like a rave review compared to the slam John Bogle delivered in a 2011 journal article:

During the five years ended June 2010, ETF investors earned far less than the ETFs in which they invested by a truly remarkable cumulative total of 28 percentage points (average ETF, +15%; average ETF investor -13%), reaffirming an apparently enduring principle of mutual fund performance: Fund investors can be their own worst enemies. 

On the web and out in the real world, there are some who hope to teach investors to profit from ETFs. Could a buy-and-hold strategy catch on?

Related post: For Higher Returns, Fire Your Broker?

Woe to the Trusting Active Investor

From Ron Lieber's column in The Times, we learn that golfing in the investment jungle may have been costly indeed. Not only was the broker Philip Horn defrauding his golfing buddies, he seems to have traded ETFs and otherwise churned his clients' accounts. Lieber cites a study suggesting that actively traded accounts sacrifice three or four percent of return annually. If so, a Horn client with $10 million could have lost out on $300,000 or more per year.

Also in the Sunday Times, Paul Sullivan marks the 20th anniversary of exchange traded funds. The first exchange-traded index funds were a great idea. The proliferation that has followed – not so great. Also, ETFs make it awfully easy to jump in and out of markets and market segments. The temptation is costly but hard to resist.

Postscript. Walking around town this morning, a wealth manager's sign caught my eye. I snapped a photo, though I couldn't quite put a finger on why the sign struck me as odd.

As I wrote this post it came to me. Look at the tagline (to protect the innocent, I've obscured the firm's name).

"Trusted wealth advisors."

Philip Horn was a trusted adviser. For that matter, so was Bernie Madoff. What investors need are trustworthy advisers. Significant difference, don't you think?

Investing With Index Funds Sensible but Difficult

Inspired by Henry Blodget's latest warning not to play The Losers' Game, Felix Salmon praises index investing. But, he admits, the investment world doesn't make it easy to practice the discipline.

In a Bogleheads presentation last fall, John Bogle indicated that investment in indexed stock funds has grown steadily over the last two decades. Nevertheless, Most wealth in stock funds is actively managed.

If index funds represent passive investing, ETFs (to the dismay of Bogle and others) are poster children for rapid-fire trading and speculation. Still nervous from those stock market zig-zags in recent months? All those aimless gyrations surely didn't come from trading in individual stocks.

Average holding period for shares in the SPDR S&P 500, according to Bogle's presentation: 3.2 days.

Are pros with algorithms and amateurs with INDX TRADR license plates making the market too scary for ordinary investors, men and women who might otherwise be able to build enough long-term wealth to need a trust officer?

Funds: The Old Order Changeth

Investment News reports that Vanguard, after becoming No. 1 in U.S. ETF sales, now plans to offer exchange traded funds in Europe.

Data from the article:

ETFs and index funds in the U.S. have taken about a fifth of the fund market…. Their market share has risen from 8.7 percent a decade earlier, and they accounted for half of new investments in 2010.

U.S. ETFs grew 15-fold in the decade ended Dec. 31, while actively managed mutual funds increased by just two-thirds.

Individual investor sales account for as little as 10 percent of European ETF assets, compared with about 50 percent in the U.S.

Illustration via Wikimedia Commons