Marcus PadleyTHIS MONTH
Anything for a quiet life
Investing in ETFs reduces volatility and risk but there are pitfalls
T
he popularity of exchange traded
funds (ETFs) is overstated in
Australia. It is a tiny market here
with $23 billion invested, which is just
0.12% of the All Ordinaries market cap.
It’s certainly growing but it is way behind
managed funds, which hold $2.8 trillion,
and is a tiny fraction of the ETFs globally,
which is a market worth over $3 trillion. It
is, however, of a similar size to the listed
investment company (LIC) market in
Australia, which is worth $32 billion.
ETFs appear to be a thriving giant of an
industry here because of prolific market-
ing. But that’s because the firms that are
marketing them are huge US companies
for which the Australian presence is subsi-
dised by their international ETF business.
The main attraction of ETFs for me
would be for people who have given up on
the volatility of shares. Instead you might
choose to simply trade ETFs. It’s a lot easier
making a few decisions each year about
which country and currency to be in than
it is managing 20 separate equities.
In the ETF world your investment con-
cerns boil down to timing asset allocation
rather than managing events in individual
shares, which is more risky and volatile, as
anyone who traded through the last results
season will testify. Results and AGM sea-
sons are becoming a bit like being on the
Marcus Padley is a director of MTIS Pty
Ltd and the author of the daily stockmarket
newsletter Marcus Today. For a free trial go
to marcustoday.com.au.battlefield during an artillery barrage. You
never quite know when you’re going to get
blown up.
Talk to some traditional stockbrokers and
they will also tell you that, for them, trading
shares is now a poor man’s game. Transac-
tion broking is not a reliable business and
they are all trying to move into “wealth
management”, a fee-oriented business that
hopefully generates a more reliable income
than starting each day with a blank book
looking for excuses to make clients’ trades.
A lot of financial advice now tells clients
that the way to manage money is managing
asset allocation across classes, not by pick-
ing individual shares. Dealing in asset class-
es instead of stocks is a great way to get out
of being responsible for stock advice but for
some it is the obvious way to go. One draw-
back is that asset allocating instead of stock
picking will bore you with its lack of action
and volatility if that’s what you’re used to.
It will, however, suit anyone who is
feeling that “there must be a better way”
to avoid the volatility, profit warnings and
stress of managing an individual share
portfolio. Trading ETFs, managed funds
or LICs alone is putting yourself in the
slow lane and this is the ETF industry's
best pitch, in my opinion. “Stock picking is
too hard, buy ETFs.” It’s a bit like Dudley
Moore’s terribly successful advertisingline in Crazy People in 1990. “Buy Volvos- they’re boxy but they’re good.” ETFs are
boring but they’re safer.
With ETFs and LICs you can also attempt
to do what a lot of financial advisers do:
assess your risk profile then direct your
money into asset classes in different per-
centages depending on how much of a chick-
en you are. Growth, conservative, balanced
or cash – just pick your percentages and it’s
done. But don’t think that’s all there is to
it. To truly get ETFs and LICs or managed
funds right, a bit of brain is still required.
For an asset-allocation-style investor the
returns come not from holding diversified
or specific ETFs but from timing your
exposure to the markets. ETFs are a bull
market instrument that is deserted in a
bear market. Sure, you can buy and hold
but if you want to protect yourself from
market risk, from a crash, from a GFC, you
still have to pay attention and time the
markets just as you would time a stock.
Of course, timing an ETF over an index is
like timing stocks but in slow motion. You
have much less volatility and far more time
because most of them don’t move much
and you are not having to make a lot of
stock-specific decisions.
The bottom line is that buying the big,
diversified, passively managed ETFs over
markets and other major asset classes are
for those who want a quieter life.
Of course, there are some pitfalls. The
industry has overstepped the mark with
some of its active ETFs. It should have stuck
to its knitting. But no, it couldn’t resist. Now
we have all sorts of momentary fads avail-
able through dicky ETFs. As one colleague
so rightly says, it’s a bit like brokers listing
at the top of the market in 2007. When an
ETF exposing you to a particular theme is
issued, it’s a sure sign the fad is over.