Why Index ETFs are Killing Your Portfolio Returns


By Dale Gillham | Published 17 September 2019


In this week’s US Stock Market Report, Dale talks with Jim Beach on his syndicated US radio show about how the attacks on the Saudi oil infrastructure may affect the market and why Index ETFs are killing your portfolio returns.

The expected rise in oil prices when the US market opens is somewhere between 10 and 20 percent, and with both Europe and the US heading into winter, it’s important to understand the ramifications of high oil prices and the impact this will have.

While higher oil prices has a knock-on effect, as energy prices rise for both consumers and industry, it also makes alternative fuel sources such as bio fuels much more attractive. The longer oil prices remain high, the more support there is for electric, hybrid and hydrogen vehicles; therefore , the Saudi oil industry will want to get back to full production as quickly as they can.

In further news, the Volatility index (VIX) in the US is moving into the same pattern that unfolded prior to the fall in December last year. The VIX, which is often referred to as the fear index or the fear gauge, is a measure of the stock market’s expectation of volatility.

Historically, the VIX averages around 20, but after the market declined last week by around 8 percent, it is currently below 14. Typically, when the VIX is low it signifies that the market will fall away soon, so it an indicator of what is likely to unfold over the next month or two? That said, it is important to understand that it does not indicate how big the fall will be, just the possibility of a fall.

Given the uncertainty in the US stock market right now, protection of your capital is paramount over the next two months. Given this, investors should not only be looking to protect their profits but more importantly their capital using a stop loss strategy if their stocks fall below 15 percent of their buy price.

Exchange traded funds are also in the news again with statistics indicating that over the past five years, the top 10 stocks in the S&P 500 combined grew by around approximately 147 percent excluding dividends while S&P 500, as a whole, only grew by around 60 percent excluding dividends.

On the other hand, the Index ETFs that track the S&P 500 achieved less than the index given that they are prone to tracking errors due to fees and other factors. On top of this, the performance of the ETFs that track the S&P 500 only beat the performance of two of the top ten stocks in the S&P 500, which is seriously concerning.

Unfortunately, many investors are choosing ETFs as their preferred investment vehicle, given that they perceived as safe and offer more control than mutual funds. However, what investors don’t fully understand is that the risks they are taking by investing in an ETF are exactly the same risks they were exposed to when investing in a mutual fund. The only benefit of an ETF is that, in principle, they can buy and sell the investment through a stock broker on the exchange at any time.

Too many investors are focusing their attention on the fees they are paying on their investments rather than the returns that are being generated by these so-called investment experts who manage the ETFs. In my opinion, investors need to ask themselves two questions: the first being, is investing in an ETF lower risk than directly investing in the top 10 stocks on the S&P 500 and the simple answer is no. The second question they need to ask themselves is do ETFs generate better returns than investing directly in stocks, and again the answer is no. And it’s not by a little, it’s by a lot. So investor’s should be concerned by this.

Dale also discusses what’s currently unfolding on the DJI and S&P 500 and his thoughts are for the coming weeks and months ahead, as well as this week’s stocks of interest. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice.


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