Barron's Cover Story On ETFs = Snoozer

In an admittedly nerdy way I was pretty excited when I saw the title of the this weeks Barron's cover story; ETFs Everywhere. It didn't take long for excitement to turn into disappointment as it was nothing more than a soft news piece written on an elementary level. At this point in the timeline of ETFs I would expect even Money Magazine to move the discussion a little further along and from Barron's I would expect actual incite insight (made a typo that a reader pointed out) on an number of salient points.

There were two different one-liners that offer a starting point for a useful discussion (not followed through on in the article) that we might be able to expand on here a little bit.

The first one was ETFs are a great democratizing force which is a point I have made many times and believe in wholeheartedly. A hedge fund has access to all sorts of foreign destinations and complex strategies. These used to be off limits to retail investors but now are obviously quite accessible to anyone inclined to spend the time.

I think the utility depends on the individual. My preference is to work ETFs into the portfolio where I think they are the best tool for a particular space. This boils to to weighing the alternative choices and picking the best.

As a follow up from yesterday they can also be a time saver for some people. Whereas everyone has a limit to how many stocks they can follow an ETF can obviously serve as a proxy for a sector, country or theme with less work than needed for any individual stocks for a given sector, country or theme. I would caution however (repeat concept) a little bit of research needs to be done on stocks with very large weightings in any ETFs you buy. And of course there must be ongoing study for any narrow ETFs used. Are you going to buy a water ETF and then not follow the industry at all?

The one-liner I liked was "Financial advisors who once picked stocks for clients and later selected mutual funds have morphed into asset allocators, and ETFs are an easy and low-cost way to get diversification." Jeremy Grantham talked about the importance of asset allocation over stock picking. This is the core of top down analysis which notes that being in the market or not accounts for about 70% of the eventual return and decisions about sectors and countries account for another 20% of the eventual return leaving stock selection as the least important final 10%. These numbers are fairly consistent across numerous studies.

While I believe heed needs to be paid to all three components (in-or-out, country/sector, stock selection) ETFs do offer the chance for success with only the first two which tying in the above contributes to the extent to which ETFs are a democratizing force.