Why Do You Have To Use An ETF?

Early in the day yesterday Matt Hougan from IndexUniverse and Paul Justice from Morningstar were on CNBC to talk about ETFs that invest in Europe. Simon Hobbs seemed to ask most of the questions and apparently was feeling feisty. Matt seemed to favor Germany and the Nordics (I am a big fan of the Nordics myself) and (sarcasm alert) shockingly Paul went as broad as possible.

Then Simon asked what's the matter with stock picking, why does anyone need an ETF, why not just buy a stock? Then he asked if this line of questioning was heresy. Matt noted that many investors are not very comfortable picking stocks which is true and he also made a similar argument as I make for country selection which ETFs allow for.

Paul suggested the Vanguard European ETF (VGK) or the iShares EMU ETF (EZU). Paul also made a case for healthcare that seemed out of context to the interview. Matt laced into him for picking VGK and EZU because they take in the good and the bad.

The premise of the conversation seemed off to me. The question is not should people buy ETFs that invest in Europe. From the top down the first thing to decide whether or not to invest in Europe and then depending on that answer what is the best way to do it. If you do want in, are you most interested in a country, a sector or the whole thing? If you want the whole thing, this would make no sense to me but some folks must want something like VGK, you know what to buy; Paul just told you.

Anyone wanting to go narrower than the entire continent needs to figure if they want to add a country or part of a sector. Adding a country is easy for many countries but if you want to go narrower you may need to pick a stock. Some of the foreign sector funds (SPDR and iShares) might be heavy enough in Europe but you'd need to look for yourself. Sticking with the Nordics if you only want exposure to Norway, Finland (uses the euro) or Denmark, and there are reasons to look at these countries, then you need to pick a stock.

Another point from Simon that I have made repeatedly is that many indexes in Europe are very heavily weighted in banks; HELLO! Both VGK and EZU have more than 20% in financials and that is after the sector imploded.

I've been picking on Morningstar from the start of this site for their inability to understand the utility of ETFs and their bottoms up analysis (S&P does bottoms up analysis as well and that too is useless) and it appears that nothing has changed.

I become more and more convinced that the new decade will require narrower exposure in portfolios which is not a bold prediction as this was clearly the case in the last decade. ETFs make this possible up to a point. For those willing to take the step to individual stocks, all the better chance for the long term result you hope for.

Well I didn't start out intending this to be an anti-Morningstar rant but there you go.