The other day I was interviewed for an article about ETFs. Part of the conversation was the way I look under the hood and thinking about an ETF (or individual stock for that matter) as being a proxy for different things or part of the exposure for some some segment.
Succinctly this means taking in to account the sector weightings of a country fund, country weightings of a sector fund and both country and sector weightings in a thematic fund. Failure to do so is how people ended up 50% in tech in 2000 or 40% in financials in 2007.
This only seems logical to me, and something I have been writing about for a long time now, but was new to the interviewer. Of course other people take these things into consideration but maybe the point is that not enough people do.
Fund screening in this context is simple spreadsheet work, or Morningstar can do it for you with their portfolio tool. A portfolio that combines stocks, thematic funds, country funds and sector funds will have some weighting in each sector and some number of countries. What are those weightings, and is that where you want to be positioned?
Taking a simplistic example, a portfolio consisting of iShares Poland ETF (EPOL), Market Vectors Gulf States Index ETF (MES) and EG Shares China Infrastructure ETF (CHXX) would seem to cover a lot of divergent ground. EPOL has 40% in financials, MES has 65% in financials (including real estate) and CHXX has 23% in real estate (which I consider to be part of financials). Obviously if someone wants that much in financials then there is no potential issue of being blindsided (only a potential issue of being wrong).
The lopsided exposures in these funds is not by itself a negative. If MES were 100% financials then a 5% portfolio weight in the fund would obviously be 5% of the portfolios in financials. Someone wanting a total of 15% could compile the other 10% for financials from other funds and/or individual stocks. For someone only using funds it might be difficult to get to each sector target exactly as hoped for but they can get reasonably close. If 10% is the desired weight, I don't think 8% or 12% would be ruinous. Wanting 10% and ending up with 40% might be.
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4 comments:
Years ago I bought mostly "value" funds thinking these offered some additional safety. Of course the are chock full of oil and mining stocks which actually serves to increase, not decrease volatility. No harm done but a lesson learned.
Also, your headline led me to believe there would be something about the TdF in this post, whats up with that?
Happy 4th.
I thought the sky was falling according to some posters and commenter's on tv. I guess no one told the market.
BTW, I hope Roger continues his pledge of not posting same day tour results so I can watch it at night and still be surprised
Anon 6:18am: There is a school of thought (Swedroe, for instance) who believe - assuming you're holding long term - you really only need value. In other words. for domestic coverage you'd have a large cap value and a small cap value.
Anon 6:45, the person that has been bearish is me Jeff from Milan, Italy. Anytime that I have posted I have placed a signature. What I said was that I was bearish because of my economic indicator was falling from January. However I was somewhat encouraged that there would be popup because the market had entered a cyclical upturn in the market and that I was hoping to unload my 10% invested to go short at some point. My comments were on June 30, June 21 and June 20(extensive). I wrote on the 20: If there is a good move up which I have written here atht should be around this time, I will unload the rest and if these indicators are in neg territory. On the 30th I even specified when this move up should end: Currently in this short cycle I have things moving up till aug 24. I like to leave with what Faber on bloomberg was saying: http://www.bloomberg.com/video/70183756/
And do not want to forget the June 18 comment on the weekend post that I was bullish on the short run because Yamada as a contrary indicator was bearish. This was on the spot of the bottom where my cycles were turning up and know that will be positive til aug.24. I think that such comments on the short run have been correct with very accurate market turning point. We do not know about the longer term. Well, I do not know. I do not have longer cycles indicator. I was basing this prediction on my eco indicator which is new and unproven and am not sure how accurate but my system will surely put me on the short side on the top and know later if it is going to be a good big short or a so-so short.
Tx,
Jeff From Milan, Italy
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