It can be a lot of fun to go to a fancy ice cream parlor and get an outrageous flavor such as bacon chocolate or chili coconut, but there is also something to be said for a plain, old-fashioned vanilla cone.
It is the same with exchange-traded funds.
For the intrepid investor, ETFs offer the chance to invest in obscure funds focused on timber stands or gold refineries, and even to make inverse bets on various markets, even at multiples of their actual upward performance. But for investors who want to earn reasonable long-term annualized gains, straightforward, passive ETFs that track specific stock indexes also offer a cheap and tax-efficient way to track different markets.
“It’s a totally valid strategy to stick with plain vanilla,” said Ben Johnson, director of global ETF research at Morningstar.
“All the research we’ve ever done shows that lower-fee funds [such as ETFs), can have greater success than costlier options,” he said. “So covering the market with lower-fee products is a very good long-term bet for a broad spectrum of long-term investors.”
That isn’t to say that investing in simple index ETFs means a client is stuck with the performance of the Standard & Poor’s or Dow index. Even for investors whose taste leans to vanilla, there are shades of flavor.
Depending on a client’s risk tolerance, an advisor could include a Russell small-cap index ETF, a global index ETF or even an emerging-market index ETF to add more diversification to a portfolio.
But not every advisor is sold on the idea of buying and holding index ETFs, even for conservative investors.
“Buying index funds and putting the portfolio on autopilot is not the best strategy. There’s no way to overweight and underweight industry segments if you do that,” said Bill Filer, and independent LPL advisor in McLean, Va.
He favors buying ETFs that among them “feature every sector of the S&P index.”
Then, “we’ll underweight and overweight different sectors, based upon our analysis,” Filer said.
It is still plain-vanilla investing of a sort, in that the sector ETFs themselves are cheap, passive products but with an active twist because the advisor can change the portfolio’s weightings over time.
Dave Lindorff is an award-winning veteran journalist, a Columbia University Knight-Bagehot Fellow in Business Journalism, a two-time Fulbright Professor to China and spent five years as a correspondent in Hong Kong covering China and Hong Kong for Business Week magazine.
This story is part of a 30-30 series on smart ETF strategies.
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