In the post Bernstein shares part of an email from Jim Wiandt in which the two enjoyed a chuckle over some of the funds that were then in the pipeline;
"a 'Dynamic Brand-Name Products Portfolio,' an Inverse Materials ETF, a Healthy Lifestyle fund, an Ellioit Wave ETF, a Georgia (the state) ETF and, my favorite, an 'Ultra-Short S&P 400 MidCap 400 Citigroup Growth' ETF."
I believe there is a typo in the word Ellioit above but I pasted the quote in and chose to leave it as I pasted it.
No doubt there have been a lot of ETFs listed that on the surface seem questionable. Some of those however do offer some tangible benefit as a secondary effect or maybe something else. I would also add that I think the short and double short ETFs are targeted more for professionals than individuals; the focus of the Bernstein article, as I read it, is the effect of these funds on individuals.
The article mentions the incredibly narrow HealthShares fund. I wrote about these for the Street.com a while back and did spell out a possible use for them in a small proportion but I don't use any personally or for clients. Bernstein wonders whether in the future the market for these funds could be pushed around in such a manner that the ETF structure effectively breaks down. If he is right then yes, holders of these funds would be hurt.
He gets a laugh from the Georgia Fund that is in the works; there are funds from a lot of states that could list like the California Fund and the Colorado Fund as other examples. I am unlikely to try to take anyone to the hole in defending this concept but the Georgia Fund, what do you think that will be? Anyone else besides me think it will have 15-20% each in Coca Cola (KO) and Home Depot (HD)? If correct the fund may still be useless but hardly a concoction of evil intended to separate unsuspecting mom and pops from their money either.
I think a more realistic take is that a lot of funds that have listed or will list soon will close up shop after three or four years with only $30 million invested regardless of performance. This is a point I have made several times in the past.
11 comments:
As a Native Georgian, here is probably what the GA fund would look like. (P.S. GA has the 3rd most companies on the Fortune 500 list)
Coke
Coca Cola Enterprises (Bottler)
Home Depot
UPS
Georgia Pacific
Delta
AFLAC (the duck!!!)
Southern Co (Utilities)
Suntrust Banks
Beazer Homes
Genuine Parts
Mohawk Industries (carpet,textiles)
Newell Rubbermaid
AGCO (farm machinery)
Bluelinx Holdings (const materials)
In addition there were another 11 companies on the F1000 list.
The metro Atlanta area is very modern and technology driven and some major technology players and telecoms have a presence here as well.
All in all that looks like a pretty well-diversified holding! Of course, I am biased.
I can sort of understand the logic. There are people that I've come across around here that watch/buy Home Depot, Coke, Delta, etc because they are Georgia based companies. I guess it's like rooting for the home team. By making a state based fund, you're not encouraging anyone to buy quality companies based on fundamentals or outlook but simply where the outfit is domiciled. That seems like a bad way to start picking a stock or a handful of stocks. Of course, abolishing this type of fund doesn't stop anyone from going out and buying all GA stocks individually.
About 4-5 years ago, I read an academic study that indicated a significant total return for those who had invested in Minnesota's top 20, 50? (I don't remember) firms. I remember thinking I wish I could invest in something like this without figuring out how to hold all the companies or which ones to hold.
An ETF that keeps to the published index and prospectus rules can allow investors to analyze and invest in themes like this now.
How is this different from the plethora of open ended funds? If there are two funds that overlap, competition on managment expense ought to be good for investors. Of course, I haven't adequately researched what would happen should the underlying firm offering the ETF go kerflooey.
Roger,
Since you don't think there is a bubble in ETFs right now, "but there is visibility for a bubble", would you mind sharing your definition of a bubble with your audience? Obviously you have a clear definition of a bubble, because you are able to compare the current situation to your definition and determine a bubble does not exist, yet.
A definition of a bubble would be very helpful to me and probably most investors. I have been lanquishing under the assumption that markets work, and that pundits simply use the term "bubble" to describe situations that are outside of their conception of normal.
Thanks in advance.
REW, My comment about a bubble is my paraphrasing of the Bernstein piece. A bubble seems like an incredibly low probability. There are many many funds with effectively no assets. I think the market could accomodate 1000 more funds with $25 million without moving the needle with the assumption that at some point they start closing.
Interesting mix of comments so far on the state funds. Maybe there is demand for them, interesting.
Slmasker, if a fund company went under I think the actual funds would be bought by other companies without necessarily disrupting the fund.
Here is my Ultra Short ETF parsing of the day:
Robert Reich
Dennis Kucinich
Al Sharpton
As per a previous post, I still like a Slovakia, Hungary,Italy and Turkey ETF. A marketing dream.
At the level of broad (and hence slightly inaccurate) generalization, I agree with the first part of the article. But I don't really understand the connection between high valuations and specializized ETFs (including leveraged inverse funds). Here is the holding and weightings for the supposedly absurd infectious disease ETF . What is he getting at when he asks "how much capital does it take to move" it? A lot more than to move any of the individual stocks. And I bet the fraction of their daily volume that is attributable to HHG trading is low in most cases.
Josh I think the question Bernstein is asking is could any of the HealthShares funds be the tail that wags the dog.
The fund you left a link to has $2.4 million in assets. Could there be a way where a really big order in one of the funds cause a domino effect.
Could someone with a deep pocket load up on options on ENZ, one of the holdings in the fund you left, then place an order to by $30 million worth of the fund causing the options to run up?
It's possible, I don't know if it would work but that, I think, is the issue he is bringing up.
I'm not getting the idea. It's much harder to move any individual stock in the index by buying the index than it is by buying the stock itself. Using the index to move the stock would be anti-leverage. It would also be harder to move the stock by buying the index compared to buying naked options.
I think you do get it. It is harder to do but that is the question, is it doable one way or another. You get it, you just don't agree.
Quick jargon alert; buy naked options. No.
If you are naked options you have sold them with no corresponding stock postion. Long stock short call, the calls are covered. short stock short puts, the puts are covered, although the term covered puts doesn't ever come up.
For anyone not getting the short stock short put as a covered position; you get assigned on a short put you are buying tock, thus closing out the short sale of the equity.
One can create a naked option position by buying or selling (puts or calls), though it's true that "naked" is more commonly used to describe option writing.
Anyway, I'm reluctant to guess what the writer meant when the guess doesn't seem sensible. It's also ossible that he has a false impression of the amount of liquidity actually available at the bid/ask in many ETFS - he may have an incorrect belief about what the bid/ask spread for an ETF means.
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