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For ETF Investors, The Details Matter

Michael Johnston — Mon, 10 Jan 2011 14:32:40 +0000

When constructing a portfolio, most investors focus on the decisions that seem to have the most significant impact on the risk/return profile delivered. How much should be allocated to stocks vs. bonds? What breakdown between developed and emerging markets is desired? What sectors should be overweight, and which should be avoided? These decisions obviously go a long way towards determining the bottom line returns delivered by a portfolio. But for investors who have embraced ETFs as a means of achieving exposure, there are a number of seemingly minor factors that can have a surprisingly large impact on their financial health. Below, we highlight five of these easy-to-overlook considerations that can add up to big differences in return [for more ETF insights, sign up for our free ETF newsletter]: 1. Weighting Methodologies Many ETF investors pay a great deal of attention to certain attributes of their equity exposure, such as the [...]

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Ten Commandments Of ETF Investing

Michael Johnston — Thu, 21 Oct 2010 11:05:53 +0000

As ETFs have burst on to the scene in recent years and worked their way into the investing mainstream, the number of products available and complexity of exposure offered has increased significantly. Advisors and investors have taken steps to educate themselves on the ins and outs of ETFs, but many are still scrambling to play catch-up and unaware of the complexities these products can present. What began as a handful of securities seeking to replicate widely-known stock and bond indexes has grown into a lineup of more than 1,000 funds, offering exposure to nearly every asset class, region, and investment strategy imaginable. While this impressive growth has enhanced the arsenal of securities available to ETF investors, it has also created the potential for misuse and made finding the right ticker symbol a bit more challenging. And while ETFs offer countless potential advantages relative to strategies that revolve around mutual funds [...]

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Six Reasons To Consider Dumping SPY

Michael Johnston — Mon, 27 Sep 2010 15:00:30 +0000

The meteoric rise of the ETF industry–and to a smaller extent the introduction of index mutual funds some 20 years earlier–has had the effect of transforming indexes from hypothetical measures of performance into investable assets. As indexing strategies continue to gain more widespread acceptance with all levels of investors, the scrutiny of construction and maintenance methodologies underlying ETF-linked indexes has intensified considerably. And where potential pitfalls have been uncovered and explained, ETF issuers have been quick to provide investors with a number of alternatives. Investors are creatures of habit, so it isn’t surprising that the majority of equity ETFs are linked to indexes that utilize long-standing, familiar construction strategies. The indexes underlying many of the most popular ETFs are market cap-weighted benchmarks, meaning that the companies with the largest equity value generally receive the largest weightings. But while the ETF industry has helped to reinforce the popularity of these indexes–such [...]

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Are Your Cap-Weighted ETFs Leaders Or Laggards?

Cathy Carlson — Tue, 13 Jul 2010 16:07:03 +0000

The rapid growth of the ETF industry in recent years has altered the investment landscape in more ways than one. The low expense ratios offered by most exchange-traded products have brought increased scrutiny on active managers and called into question their ability to add value to client portfolios. The immediate diversification offered by a basket of securities has caused some to shift away from the complex research associated with individual stock picking towards more macro analysis required for tactical strategies. And as indexes have evolved from hypothetical measures of performance to essentially investable assets, the methodologies utilized in the construction and maintenance of benchmarks have become increasingly important to investors [see our database of ETF indexes]. The first generation of equity ETFs was dominated by market capitalization-weighted strategies, a methodology that involves assigning a weight to each component based on the total value of its equity. Most of the assets [...]

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Beyond SPY: Nine Alternatives To S&P 500 ETFs

Michael Johnston — Wed, 21 Apr 2010 21:29:17 +0000

When ETFs began to make their way into the investing mainstream, almost all products were “plain vanilla” funds linked to well known stock benchmarks, such as the Dow Jones Industrial Average and S&P 500. But as the popularity of ETFs has surged, so too has the number of product offerings, with approximately 30 issuers now competing for a slice of a still-growing pie. In addition to offering exposure to different asset classes (such as commodities, volatility, and hedge funds), many ETFs now present unique approaches to stock and bond investing by tweaking popular and widely-followed benchmarks. The very first ETF, the S&P 500 SPDR (SPY), remains by far the largest U.S.-listed ETF, reflecting investor familiarity with the underlying benchmark. Between SPY and the iShares S&P 500 Index Fund (IVV), assets in S&P 500 ETFs at the end of March exceeded $100 billion, or about 12% of total ETF assets. So [...]

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What’s In A Name: A Look Inside ETF Tickers

Michael Johnston — Wed, 03 Feb 2010 14:42:04 +0000

Whenever a company prepares for a public offering, executives have been known to spend an inordinate amount of time choosing the combination of letters that will serve as the company’s ticker and often nickname within the investment community. To many, the fixation on selecting the perfect ticker seems like an irrational obsession on par with Patrick Bateman’s affinity for business cards. But there’s some evidence to support the idea that picking a clever ticker can be worth quite a bit of money. An academic study titled “Would A Stock By Any Other Ticker Smell As Sweet?” (PDF) examined the performance of “clever ticker” stocks such as Southwest (LUV), Internet America (GEEK), Lion Country Safari (GRRR), and Explosive Fabricators (BOOM). This study uncovered that between 1984 and 2004, “a portfolio of clever-ticker stocks would have beaten the market by a substantial and statistically significant margin, contradicting the efficient market hypothesis.” Theories [...]

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Five Twists On S&P 500 ETFs

Michael Johnston — Tue, 27 Oct 2009 07:00:52 +0000

The S&P 500 is one of the most widely-followed benchmarks in the world, a bellweather of the American economy that is included in the Index of Leading Indicators. Composed of 500 of the largest stocks listed in the U.S. (as well as a handful of non-U.S. companies), the S&P 500 has a weighted average market capitalization of approximately $80 billion, and includes companies across all sectors of the economy. With the rise of indexing as an investment strategy, it’s not surprising that S&P 500 ETFs are among the largest and most heavily traded. With a market capitalization of more than $57 billion, the SPDR S&P 500 (SPY) is by far the largest ETF, nearly $20 billion larger than its closest competitor. The iShares S&P 500 Index Fund (IVV) comes in at number four on the list with almost $21 billion in assets, meaning that U.S. investors have nearly $80 billion [...]

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Weighting Methodologies: An ETF Report Card

Michael Johnston — Tue, 27 Oct 2009 06:00:50 +0000

Advisors and individuals who favor a tactical asset allocation to investing have historically analyzed broad macroeconomic trends and statistics to identify asset classes and sectors poised deliver strong returns. In the early days of the ETF industry, this meant homing in on a certain sector or style and picking the fund that tracked that segment. But as the landscape has continued to evolve, asset class and investment style aren’t the only decisions investors face. Market capitalization weightings were once the only game in town, but in recent years alternative weighting methodologies have become more popular among investors who find flaws in a strategy that gives the most weight to the biggest companies. The vast majority of ETF assets is still in traditional market capitalization-weighted funds (and most of the largest and most popular ETFs fall into this category). But investors have embraced a number of other strategies in recent years, [...]

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ETF Database » EPS

For ETF Investors, The Details Matter

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