Here’s why financial advisors need to do their homework when its comes to investing in ETFs: because “holdings and costs drive ETF future performance more than their historical record,” says Todd Rosenbluth, director of ETF and mutual fund research at CFRA, an independent research firm.
Buying the cheapest, better past performer and commission-free ETF is not the best strategy, according to Rosenbluth, who spoke at one of two inaugural sessions of the Inside ETFs conference underway in Hollywood, Florida. “Know what’s inside a portfolio.”
Case in point: two semiconductor ETFs that both lost money in 2018 but one far more than the other. The VanEck Vectors Semiconductor ETF (SMH) fell about 6%; the SPDR S&P Semiconductor ETF fell nearly 10%, in large part because it had a much heavier weighting of Intel, which was basically flat in 2018. It also owned Lam Research, which lost close to 30% last year.
Another example from Rosenbluth showed a much greater disparity in performance: two ETFs with “uranium” in their names: The Global X Uranium ETF (URA) lost more than 20% in 2018; the VanEck Vectors Uranium+Nuclear Energy ETF (NLR) gained about 5%. Despite the similarity in names, the VanEck ETF was heavily invested in utilities, which are the key owners of nuclear energy in the U.S. and one of the strongest performing sectors in 2018. The Global X ETF owned few utilities but was heavily (40%) invested in energy stocks, the worst performing sector last year.
Another warning from Rosenbluth: “The largest, cheapest ETF is not necessarily the best.”
IVV, iShares Core S&P 500 ETF, and SPY, its SPDR counterpart, are the two largest ETFs by assets, but they have experienced the biggest outflows among ETFs so far this year. Although both are ETFs based on the S&P 500 index, IVV had inflows of $18.5 billion last year while SPY had outflows of $16.5 billion, according to ETF.com.
— Check out Ric Edelman’s List of Industries at Risk on ThinkAdvisor.