Skip to main content

Sound Advice: February 22, 2023

Always Look at Underlying Fund Holdings

It seems easy enough to look at the name of a mutual fund or exchange-traded fund and assume what kinds of stocks are held by the fund.  But in more than a few cases, that assumption could prove costly.  A common example of this would be mutual funds that are labeled “aggressive”.  That’s a label that one would think suggests the likelihood of above average potential for gains.  More likely, however, it means the fund holds stocks that are highly volatile.  In weak markets, they will probably fall farther; in strong markets, they might rise faster.  But the greater likelihood is that the label is a marketing gimmick for underlying holdings that are relatively benign.

There is another wrinkle of greater concern.  That’s the tendency of some investors to buy a number of large, well-known funds to provide what they believe will be diversification.  At first glance, that would seem to make sense.  The problem, however, is that as fund assets grow, the universe of widely traded stocks narrows.  Why? Because funds running billions of dollars have to focus on stocks with good liquidity, i.e., hundreds of thousands of shares daily.  So as their asset bases get bigger, they end up buying many similar stocks.  The net result is that the investor who buys a bunch ends up holding funds with numerous duplications.  And the hoped-for diversification is not achieved.

A third concern is the prevalence of lopsided holdings.  QQQ, for example, which is the Invesco QQQ Trust, has almost 30% of its assets in Apple, Microsoft, and Amazon.  SPY, the SPDR S&P 500 ETF, has more than 20% concentrated in Apple, Microsoft, Amazon, Meta (Facebook), and Alphabet. Then there’s IHF, iShares U.S. Healthcare Providers ETF, which has 37% of its assets in United HealthCare, CVS, and Anthem.  And, no surprise, there are others of this ilk.

The hitch here is that instead of getting diversification, you end up with heavily biased funds that bring with them the considerably increased risk that you tried to avoid by not buying individual stocks.

One approach to sidestep this problem would be to consider ETFs with equal-weighted underlying holdings.  For the S&P 500, an alternative would be RSP, Invesco S&P 500 Equal Weight ETF.  For technology, one could consider RYT, Invesco S&P 500 Equal Weight Technology ETF. The underlying holdings of both of these do indeed offer broad and evenly distributed access to the stock segments they represent.

 

N. Russell Wayne, CFPÒ

203-895-8877

Any questions?  Please contact me at nrwayne@soundasset.com 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more

Sound Advice: October 12, 2022

More Pain Ahead? It’s been a difficult year for the investment markets, but tough times have happened before and they will certainly happen again.   Sometimes recoveries are relatively quick and sometimes a hefty dose of patience is required.   No two downdrafts are alike, but the net result is always a rebound to even higher levels than seen before. One of the most uncomfortable stretches over the last half century took place during the oil embargo days of the early and mid-1970s.   Market valuations fell to the high single digits, a level that was about half the historic average.   For investors, this was one of the great sales of all time.   Those who had the courage to get aboard reaped huge rewards. More recent pullbacks of note took place during the dot.com days of the turn of the millennium and the banking crisis of 2008-9.   The former period was marked by what appeared to be investors’ absolute indifference to longstanding measures of reasona...
Post a Comment
Read more