Exchange Traded Funds (ETFs) are terrible investments for most people.
I know that goes against conventional wisdom and everything you’ve ever read about them.
For a number of reasons you’ll see below, ETFs are not and will never be the solution to most investors problems.
I’ve said that for years and have been proven right time and again.
But I’ve recently made a subtle, yet very important change to that stance because a major opportunity has finally been made available to regular investors.
Don’t Buy Another ETF Until You Read This
A few months ago I actually recommended an ETF to readers for the first time in over a decade.
It’s already quadrupling the return of the S&P 500 and there’s much more to come.
But it’s not a regular ETF. It’s something much, much better.
Today you’ll learn what it is, how it works, and why you should be using them now.
We’ll start with basic ETFs.
I get the general case made for ETFs. They offer lower fees, instant diversification, and as close to market-matching performance as you’ll find anywhere.
I get the allure and, in my early days as an investor, was actually sucked into them.
The grandaddy of all ETF’s is the SPDR S&P 500 ETF (SPY).
In the late 90s and early 2000s it was marketed with all the hype of a new burger at a fast food chain.
There were slick TV commercials and an endless list of promises and benefits.
The tagline was “Don’t try to beat the market, buy the market” or something like that.
ETFs were an attractive alternative in a world where less than 95% of mutual funds fail to beat the market.
Time and experience, however, has taught me their flaws.
The main problem -- which no investment vehicle can solve -- is not the investment vehicle, but the investors themselves.
Most investors tend to buy and sell at the worst possible time. That’s just how it was, is, and always will be.
But that’s just part of the problem. The other major part of the problem with ETFs is structural.
Historical data has shown about half of a stock’s return is driven by the overall market. About 30% is determined by the sector. And the remaining 20% is driven by individual stock itself.
So a major index ETF which buys the whole market misses out on half of the potential returns of stocks.
Even a sector-specific ETF misses out on the remaining 20% of opportunity investors have to make.
So buying and holding an ETF is pretty much giving up on the chance to make real money in stocks.
But thanks to a recent innovation, I’ve found an ETF which is ideal for most investors.
In many ways, it’s even better than individual stocks.
Why Investors Plowed $400 Billion Into New Breed Of ETFs
There is a new type of ETF which, if chosen wisely, can be a tremendous tool in help you beating the markets.
They’re called “Smart-Beta ETFs.” They’re starting to attract a lot of attention and capital from investors. And rightly so.
A Smart-Beta ETF is only slightly different than a regular ETF, but that slight difference in structure is creating a huge difference in returns, potential, and whether you should buy them or not.
Go back the S&P 500 ETF mentioned before.
Today it’s grown to hold more than $170 billion in assets and it and many other ETFs which track the major indices make up a bedrock of many portfolios.
As advertised, they are the market.
Smart-beta ETFs though, are the part of the market you actually want to own.
Do you want exposure to cheap European stocks without having to get hid by any further drop in the value of the Euro?
Well, there’s now a Smart-Beta ETF that only buys shares in the largest European exporting companies.
Or do you want airline stocks which only meet certain stringent financial and share price momentum criteria?
There’s a new airline ETF which does just that.
Or do you want a Real Estate Investment Trust (REIT) ETF which only buys the highest yielding REITs?
There’s one of those too.
There are hundreds of Smart-Beta ETFs which do all kinds of specific and desirable things which can really give you the extra edge on the market.
And investors -- your editor included -- are waking up to the real potential they offer.
The chart below shows the growth of ETFs and the growth of Smart-Beta ETFs (source):
The lightly shaded columns are for regular ETFs. The much smaller and darker shaded columns are the assets of Smart Beta ETFs.
The chart shows ETFs have now passed $2 trillion in assets.
Meanwhile, Smart Beta ETFs have attracted $400 billion.
I think that investors understood the difference between the two, the chart would be completely reversed.
There are just so many advantages offered by Smart-Beta ETFs.
This ETF Quadrupled the S&P 500 Over the Last Year
When I took over the Advanced Wealth Letter, I wanted it to be helpful to as many investors as possible.
Whether experienced investors looking for new ideas or newer investors looking for how to survive and thrive in one of the potentially most dangerous markets in years.
It was going to use all the tools available to us as investors than just buying stocks outright. Because in the next few years you’re going to be happy you have those tools.
Smart-Beta ETFs could and should be one of those tools.
The one I recommended specifically combines a mix of value and price momentum. It’s a strategy that has worked for decades. And if history is any indicator, there are great things ahead for it.
In the last year it has quadrupled the returns of the S&P 500.
In the last three months it has quadrupled the returns of the S&P 500.
That’s the type of opportunity investors willing to look beyond the obvious mutual funds and ETFs can achieve if they’re willing to look for, understand, and use them.
If you make sure you’re one of those investors, you’ll do well whichever directions the markets take from here.