"It's a stock-picker's market," they always say after markets collapse and investors start hunting for individual winners. Nonsense. It's never a stock-picker's market, or it shouldn't be. Sure, picking stocks is fun, but so is playing roulette, and the two have roughly equal chances of making you money.
Don't believe me? Ask yourself: Did you see the great financial crisis coming? Some savvy investors did, and they weren't just looking at the 20 stocks in their portfolios-wondering if they should sell Allied Apricot and buy Amalgamated Butternut. They were looking at interest rate spreads, leverage, derivatives and other macro variables, then acting accordingly.
The truth is that the vast majority of your returns-roughly 90%-don't come from your choices of individual stocks or other securities, but from getting the big picture right. What's your asset allocation between stocks, bonds and cash? Within these categories, how much will you put in developed and emerging markets, in real estate and natural gas, in bank deposits and gold?
Fortunately, it's easier than ever to invest along macro lines thanks to exchange-traded funds. ETFs trade like stocks and many of them track indexes for stocks, bonds, commodities and so on, but they have much lower annual fees than mutual funds. You can invest in pretty much any sector or geographic area. Like gold? You can buy a bullion ETF or a basket of gold-company stocks-which often rise more than the metal itself if bullion prices go up. Brazilian stocks? Ditto. Emerging Asian bonds? Them too. There are about 1,800 ETFs traded around the world, according to Barclays Global Investors.
Hahn Investment Stewards in Toronto is part of the U.S.-based Jovian group of companies, which manages $2.4 billion worth of ETFs worldwide. Hahn's ETF returns generally outpace comparable mutual funds that hold individual stocks, but Tyler Mordy, the head of research, says only part of the gap is due to lower fees.
Another reason: It's getting harder for stock-pickers-even those who are professional money managers-to beat indexes. The old-style value investing discipline required is also very time-consuming. Given how difficult it is to understand, say, a bank's balance sheet, aren't you better off buying an ETF of financial services shares? Also remember that any single bank stock could plunge for reasons of its own. If you owned an ETF, you'd be cushioned by the holdings in the rest of the fund. "It's very liberating," says Mordy. "You don't feel the need to react to every tick in the market. You can shut out a lot of the noise."
Relying on ETFs also means you can concentrate more on asset allocation, and trends among asset classes. For example, Mordy says that the correlation between many different types of investments has strengthened over the past couple of decades. The traditional 60/40 stock and bond portfolio is looking less and less safe by the day, because it's now almost perfectly correlated to the Standard & Poor's 500 index. You may not be protecting yourself by combining stocks and bonds.
You'll also still have plenty of choice with ETFs. Mordy and crew are currently looking at energy, niche technology companies, food and several other specialized strategies-all with ETFs.
But doesn't Mordy miss the thrill of betting on a stock? "If you have that speculative urge, then, sure, go to Vegas or buy a junior mining play," he says. But it's no way to invest all your savings.
There are now more than 1,800 exchange traded funds worldwide, and much more than plain-vanilla index funds to choose from. Here are some of the more exotic offerings and what they invest in.
› Claymore S&P Global Water Index ETF
Utilities, water treatment companies, pump manufacturers and more
› Emerging Global Shares DJ Emerging Markets Financials Titans Index Fund ETF
Large banks and insurance companies, about two-thirds of them in China and Brazil
› iShares iBoxx
£ Corporate Bond Ex-Financials ETF Sterling-denominated bonds in non-financial sectors such as consumer goods and health care
› iShares MSCI Turkey Investable Market Index ETF
More than 20 large caps and mid caps, including Turkiye Garanti Bankasi (banking) and Turkcell Iletisim Hizmet (cellphone service)
› Van Eck Market Vectors Brazil
Small-Cap ETF Companies that earn most of their revenue from Brazil's growing domestic economy, rather than volatile international trade
› State Street
SPDR S&P Oil & Gas Equipment & Services ETFU.S.-listed suppliers of extraction equipment, including Diamond Offshore Drilling and Halliburton