In This Issue:
- Despite the Bad Press, ETFs are Better Than Mutual Funds
ETF Talk: Chinese Funds’ First-Half Rise Outstrips Alternatives
- A Downright Ugly Q3
- ‘ETF Success with Doug Fabian’ Goes National!
- Can’t Get No Satisfaction
Despite the Bad Press, ETFs are Better than Mutual Funds
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When it comes to public relations, exchange-traded funds (ETFs) haven’t had it all too well. It was just more than six weeks ago that the world of ETFs suffered the embarrassment of Aug. 24. That was the day of the crazy mispricing action that resulted in some of the market’s most stable and widely held ETFs opening 25%, 35% and even nearly 50% below the prior session’s close.
A toxic combination of massive imbalances between sell orders and buy orders, the implementation of Securities and Exchange Commission (SEC) “Rule 48” that caused a lack of transparency and circuit breaker rules that halted trading for short periods added up to a public relations (PR) nightmare for ETFs.
This situation also forced us to rethink a principle that we had previously held on to for many years, and that is the principle of always putting in a stop-loss order on any position we enter.
Another likely result of the August ETF PR kerfuffle will be the bashing of ETFs as “too dangerous,” “too volatile” and “too risky” by the mutual fund industry.
Although I haven’t yet seen widespread, public bashing of ETFs happen in earnest, I do know that many traditional mutual fund advisors have been using the pricing disruption in ETFs as a tool to criticize the use of ETFs. While we still recommend mutual funds from time to time in my Successful ETF Investing newsletter, for the most part I am vehemently opposed to their widespread use.
Here are just some of the reasons why you shouldn’t be buying mutual funds (the exception here is in your 401(k)-type accounts).
When it comes to ETFs vs. mutual funds, there really is no comparison for individual investors.
Outrageous fees. I know there are many reasonably priced funds out there, but the number of funds that still sport extraordinarily high fees is ridiculous. Although mutual funds should be disclosing the amount of fees they’re charging in dollar terms within their statements, the mutual fund lobby has still managed to blunt any simple, transparent disclosure of such fees.
Exit charges and sales loads. In addition to the high management fees of 1-2% on many funds vs. expense ratios of 0.15-0.25% on similar ETFs, there also are plenty of exit fees and sales loads that never really seem to be fully explained or disclosed in a really clear manner when you redeem shares.
Inefficient taxation. Because mutual funds tend to have high turnover in terms of the positions bought and sold by active fund managers, investors get stuck with the tax consequences of capital gains (unlike indexed ETFs, which have little or no turnover).
Lack of access. Although there are many mutual funds out there, most do not invest in commodities, currencies or alternative strategies. Compared to ETFs, mutual funds do not give investors anywhere near the flexibility of ETFs when it comes to investing in single countries, single sectors, industry groups, leveraged funds, etc.
Lack of innovation. There hasn’t been much innovation in mutual funds these days. Since launching a new mutual fund is very expensive, and since the field is crowded already, fund companies have basically been stagnant in terms of new offerings. It’s the opposite situation for ETFs, where each year we see hundreds of new ETFs offering interesting ways to gain low-cost exposure to markets.
Are there problems with ETFs? Yes. The August mispricing incident did expose a flaw in the system during times of acute market stress. However, that incident should not be a sufficient reason to listen to the ETF naysayers -- and I especially don’t want you to make the mistake of buying into the anti-ETF PR from mutual fund advocates.
ETF Talk: Chinese Funds’ First-Half Rise Outstrips Alternatives
Rounding out the category of the top three emerging market exchange-traded funds (ETFs) for the first half of this year is another Chinese small-cap fund, iShares MSCI China Small-Cap ETF (ECNS).
Rather than focus on any specific market exchange, this fund holds a swath of Chinese small-cap companies. During the Chinese bubble earlier this year, the performance of ECNS ranked among the strongest emerging market funds because small-cap stocks tend to make bigger moves than their larger counterparts.
View the current price, volume, performance and top 10 holdings of ECNS at ETFU.com.
Assets managed for this fund at the mid-year mark totaled $48.39 million. This amount falls beneath my recommended threshold for investment. However, this ETF’s strategy is one that is worth bringing to your attention. My view is that the more knowledge you have as an investor, the better you can make informed decisions.
A return of 27.63% from January to June earned this fund its position as the third-best emerging market fund for the first half of 2016. It also added a 2.77% yield to its total return during that time. As the chart below shows, this strong performance has not held up in recent months.
The top 10 largest positions in this fund comprise 11.01% of its assets. The top five of these are Shenzhen International Holdings Ltd., 1.42%; Sunny Optical Technology Ltd., 1.25%; Skyworth Digital Holdings Ltd., 1.21%; Minth Group Ltd., 1.10%; and China Traditional Chinese Medicine Co. Ltd., 1.08%. The most prominent sector holdings for ECNS are in consumer cyclicals, technology and real estate.
If you expect a turnaround in Chinese small caps, iShares MSCI China Small-Cap ETF (ECNS) could be a good way to gain broad exposure to that market segment.
Remember to look for the current price, volume, performance and top 10 holdings of ECNS at ETFU.com
The Truth Behind Vanguard’s Warning to Advisors
We recently received a reminder of just how volatile the market can be. The 1,000-point Dow drop was certainly a shocking event, and industry titan Vanguard claims this could be the start of a “lower growth world.” If only that were the case…
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If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.
A Downright Ugly Q3
What can you say about a third quarter that witnessed the worst decline in the major domestic averages since 2011?
You call it a downright ugly Q3.
Just about everywhere you looked among domestic and global equities, it was easy to see a whole lot of red.
The table below of the top 10 domestic equity funds by year-to-date performance shows that even the best funds in 2015 saw a lot of bloodletting in Q3.
|TICKER ||NAME ||2015 Q3 || YTD% |
|PNQI ||PowerShares NASDAQ Internet ||-5.80 ||2.97 |
|RFG ||Rydex S&P Midcap 400 Pure Growth ||-6.57 ||1.49 |
|MTUM ||ISHARES MSCI USA MOMENTUM ||-4.52 ||0.22 |
|PWB ||PowerShares Dynamic Large Cap Growth ||-4.53 ||0.14 |
|RZG ||Rydex S&P Smallcap 600 Pure Growth ||-10.27 ||-0.01 |
|MNA ||IQ Arb Merger Arbitrage ETF ||-3.13 ||-0.36 |
|FV ||FIRST TRUST DW FOCUS 5 FUND ||-10.31 ||-0.45 |
|PBP ||PowerShares S&P 500 BuyWrite ||-3.07 ||-0.80 |
|JKE ||iShares Morningstar Large Growth Index ||-5.65 ||-1.06 |
|IVOG ||VANGUARD S&P MID-CAP 400 GRO ||-7.09 ||-1.09 |
Things were even worse internationally, as the table below of the top 10 global equity funds by year-to-date performance shows.
|TICKER ||NAME ||2015 Q3 || YTD% |
|GWX ||SPDR S&P International Small Cap ||-9.83 ||0.77 |
|RXI ||iShares S&P Global Consumer Discretion ||-6.51 ||0.25 |
|FNDC ||SCHWAB FUNDAMENTAL INTL S/C ||-8.46 ||-0.66 |
|KXI ||iShares S&P Global Consumer Staples ||-1.20 ||-0.84 |
|SCHC ||SCHWAB INTL SMALL-CAP EQUITY ||-8.82 ||-1.07 |
|IXJ ||iShares S&P Global Healthcare Sector ||-9.43 ||-1.09 |
|ACWV ||ISHARES MSCI ALL COUNTRY WOR ||-3.92 ||-2.73 |
|DBEF ||DB-X MSCI EAFE CURRENCY-HEDG ||-8.87 ||-3.41 |
|GQRE ||FLEXSHARES GLOBAL QUALITY REAL ESTATE ||-3.32 ||-4.14 |
|PSP ||PowerShares Listed Private Equity Portfolio ||-9.40 ||-4.37 |
There was not much winning going on, either at home or abroad, in equity land in the third quarter.
We can attribute these declines to a toxic combination of global growth concerns fueled by China’s economic slowdown and the uncertainty of what the Fed is going to do about monetary policy.
Until both of these headwinds begin to tame, I suspect markets are in for a tough slog in Q4.
As for the major market exchange-traded funds (ETFs) we monitor every day, it was a familiar tale of woe.
|TICKER ||NAME ||Q3% ||YTD% |
|DIA ||SPDR DJIA TRUST ||-7.51 ||-8.58 |
|SPY ||SPDR S&P 500 ETF TRUST ||-6.91 ||-6.77 |
|QQQ ||POWERSHARES QQQ TRUST ||-4.96 ||-1.44 |
|VTI ||VANGUARD TOTAL STOCK MKT ||-7.76 ||-6.87 |
|EFA ||ISHARES MSCI EAFE ETF ||-9.72 ||-5.79 |
|EEM ||ISHARES MSCI EMERGING MKT ||-17.26 ||-16.57 |
|FXI ||ISHARES CHINA LARGE-CAP ETF ||-23.06 ||-14.78 |
|IEV ||ISHARES EUROPE ETF ||-8.99 ||-6.42 |
|EWJ ||ISHARES MSCI JAPAN ETF ||-10.77 ||1.69 |
The only market segment that did reasonably well was bonds, as you can see in the table below of three prominent bond ETFs.
|TICKER ||NAME ||2015 Q3% ||YTD% |
|TLT ||ISHARES 20+ YEAR TREASURY BO ||5.18 ||-1.89 |
|AGG ||ISHARES CORE U.S. AGGREGATE ||0.74 ||-0.49 |
|TFI ||SPDR NUVEEN BARCLAYS MUNI ||1.64 ||-0.21 |
Yes, with the exception of bonds, Q3 was downright ugly, and there is just no putting lipstick on this third-quarter pig.
Fortunately, subscribers to my Successful ETF Investing newsletter were out of the market for most of Q3, as our proprietary Fabian Plan gave us the signal to step aside in domestic and international stocks well before the worst of the selling.
If you want to put the power of the Fabian Plan on your side, then please check out my Successful ETF Investing advisory service today!
'ETF Success with Doug Fabian’ Goes National!
Are you a regular listener to my radio show, “ETF Success with Doug Fabian”?
If not, then I hope you soon will be, and here’s your chance.
Today, I am very excited to announce that my weekly radio show is now syndicated nationally throughout the Salem radio network.
The table below shows the station, city and day and time the show will be aired (check your local listing for start dates, as not all stations carry the show yet).
|WAFS-AM ||Business Radio 1190 ||Atlanta ||Sundays 6:00 am |
|WGKA-AM ||AM 920 The Answer ||Atlanta ||Sundays 10:00 am |
|WHK-AM ||AM 420 The Answer ||Cleveland ||Sundays 6:00 am |
|WTOH-FM ||89.8 FM The Answer ||Columbus ||Sundays 5:00 pm |
|KVCE-AM ||AM 1160 The Business Authority ||Dallas ||Sundays 2:00 pm |
|WDTK-AM ||News Talk 1400 ||Detroit ||Sundays 8:00 am |
|KGU-AM ||AM 760 Business Radio ||Honolulu ||Wednesdays 2:00 pm |
| || || || |
|KNTH-AM ||AM 1070 The Answer ||Houston ||Weekdays 9:00 pm |
|KHTE-FM ||96.5 FM The Answer ||Little Rock ||Saturdays 8:00 am |
|WGTK-AM ||AM 970 The Answer ||Louisville ||Saturdays 7:00 am |
|WZAB-AM ||AM 880 Business Radio ||Miami ||Sundays 2:00 pm |
|KYCR-AM ||AM 1570 Business Radio ||Minneapolis ||Sundays 6:00 am |
|WNYM-AM ||AM 970 The Answer ||New York ||Sundays 4:00 pm |
|WBZW-AM ||AM 1520 Business Radio ||Orlando ||Saturdays 8:00 am |
|WNTP-AM ||News Talk 990 AM ||Philadelphia ||Sundays 9:00 am |
|KKNT-AM ||960 AM The Patriot ||Phoenix ||Saturdays 5:00 am |
|WPGP-AM ||AM 1250 The Answer ||Pittsburgh ||Saturdays and Sundays 5:00 pm |
|KSAC-FM ||Money 105.5 FM ||Sacramento ||Saturdays 9:00 am |
|KLUP-AM ||AM 930 The Answer ||San Antonio ||Saturdays 6:00 pm |
|KCBQ-AM ||AM 1170 The Answer ||San Diego ||Sundays 3:00 pm |
|KDOW-AM ||AM 1220 Business Radio ||San Francisco ||Sundays 8:00 am |
|KKOL-AM ||AM 1300 Business Radio ||Seattle ||Wednesdays 3:00 pm |
|KLFE-AM ||AM 1590 The Answer ||Seattle ||Saturdays 1:00 pm |
|WGUL-AM ||AM 860 The Answer ||Tampa ||Saturdays 5:00 pm |
|WWRC-AM ||AM 1260 The Answer ||Wash. DC ||Sundays 4:00 pm |
The syndication of “ETF Success with Doug Fabian” is something I’ve been looking forward to for some time, and it’s a dream come true for me.
I hope you’ll join me in living this dream each week, on the station, day and time near you.
Can’t Get No Satisfaction
“Man is the only animal whose desires increase as they are fed; the only animal that is never satisfied.”
-- Henry George
Our increased desires often are a source of sorrow. Yet the desire for more in life -- more money, more love and more success -- is what leads us to develop, create and invent societal improvements. That’s why it’s a good thing that we, as Mick Jagger would say, “can’t get no satisfaction.”
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about the disappointing performance of the market in Q3. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
All the best,
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