The BIG Index & ETF Lie! (The #1 Problem)
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- Опубликовано: 19 сен 2024
- The BIG Index & ETF Lie! (The #1 Misconception!)
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As the stock market is currently going through another period of global volatility and uncertainty, many investors use passive investing strategies, index funds and ETFs to diversify and manage their risk. And the popularity of ETFs shows no signs of dying down. In fact, demand for ETFs continues to be high as literally hundreds of new ETFs have been launched in 2021 and 2022. As of 2022, ETFs account for more than 20% of market volume and about a third of the total dollar volume traded each day according to the NYSE. However, I believe that especially online you may encounter a fair amount of misinformation about ETFs and I would argue that there are also some meaningful misconceptions surrounding ETFs and indices among retail investors. So in today’s video, I want to warn you about one major misunderstanding and provide a couple of examples that will help you develop a better understanding of ETFs!
Let us clarify what an ETF is: exchange-traded funds (ETFs) are a type of mutual fund that trade on public exchanges just like a stock. So ETFs can be bought and sold during market hours, just as stocks can. This is why they are called exchange-traded funds. And essentially, they are trying to bundle a basket of different assets into one product, so for example stocks, bonds, or other assets. The main difference between ETFs and index funds is that index funds can only be traded at the end of a trading day, ETFs may have lower minimum investments and ETFs may be more tax-efficient than most index funds.
So what’s the problem with ETFs? Well, I think overall passive investing approaches via ETFs are the best way to invest for the vast majority of people, especially those who don’t have an interest in spending hours reading individual companies’ annual reports, listening to conference calls, and coming up with valuation models. John Bogle, the father of passive investing was absolutely right when he said, "The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors, and manager selection, leaving only stock market risk."
However, there are a couple of major misconceptions about ETFs and the one that I want to talk about in this video is that I suspect many retail investors think that ETFs are exactly the same as index funds. Which is simply not true. Of course, both ETFs and index funds share a lot of similarities, but while indeed many ETFs are just another form of passive investing and indexing, aiming to match the performance of a particular index such as the MSCI World, the Dow Jones, the S&P500, or the NASDAQ, many ETFs are actually anything but passive. And I think the average investor is simply not aware of this.
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I hope you enjoyed the content!
Thanks for another informative and entertaining video Rene. I don’t mind clickbaity ttitles actually as long as the video then provides some value. Keep it up!
That's how I think about it as well. Would love the algorithm to work differently but that's just he way it is right now.
Truth
It may be a silly question but can someone explain what drives the value/price of an S&P500 ETF such as VOO or STRV? Does the ETF just follow the movement of the S&P500? or is it supply & demand of the ETF?
Are you investing some of your money passively?
I use a MSCI World Quality Factor ETF (I believe companies with consistently high ROE and earnings growth will outperform) as a way to "pay myself first". This is the automated part of my investing that just gets done every month without me doing anything. For my individual stocks I use another broker and actively manage it.
I started investing in the MSCI World. I now switched to the MSCI Quality as well. Terry Smith convinced me!
Once I start investing some of my money passively, I will strongly consider this index as well. How much of your investment goes to the passive part of your portfolio?
I found the numbers he shared also quite illuminating Carry.
@ I have a set amount of my primary income ( about 20%) that goes directly into the ETF. I try to invest at least 50% of my primary income (this doesn't include Seeking Alpha and other sources) and the remaining 30+% are invested opportunistically if I see good deals in stocks I own/in my investable universe.
Thanks Rene, great content as always.
A pickle I'm in is that I aspire to surpass market returns, and be semi active, but don't necessarily want to spend hours each week doing research. Do you know of an author or approach that is somewhere in the middle? Currently I've read into acquirers multiple, magic formula, and superimvestor cloning, but then I saw your video on how the magic formula hasn't done well the last ten years. Was wondering if you had any other suggestionsor know of someone who's demonstrated an approach? I wouldn't mind even doing a little more work than what the magic formula or acquirers multiple suggests but don't want to dive into the weeds of things
Well, that's the approach I teach: owning super high quality businesses with little portfolio turnover. This concept is taught by folks like Chuck Akre Terry Smith, Munger and even Pabrai seems to be transitioning into this approach.
You might enjoy the shareholder letters by Nick Sleep.
I should've added that to find them, you need to look for the Nomad Partnership letters.
@ thank you!
You'd do well to quote your sources.
Utpal Bhattacharya, Benjamin Loos, Steffen Meyer, and Andreas Hackethal. University of Technology, Sydney, Australia. 2010.
Depending on what device you are watching the video on, there may be some kind of digital frequency noise in the background. Not exactly sure what caused this, but I'll try to fix it in my next videos.
Not a great video. Could have said this in 20 seconds. Would have been better if you compared the difference that 0.5% vs. 1.0% makes to returns over say 10 year period thereby emphasizing that costs matter.
I do index funds in my 401k and etf in my backdoor roth. My taxable portfolio is cash and real estate.
greedy when others are fearfull-
Passive investors just dollar cost average I guess.
🗣Warden buffay
Great video. Those popup sound effects were painful. I had to p the volume to hear you and then they were painful on the ear. Yes, this is an old video - Just saying
A helpful video though. Thanks you.
Sorry about that. WHat I find really hard is managing audio in a way so that it is of high quality on a wide range of devices. I've noticed huge differences between listening to my videos on my phone, with JBL speakers or with headphones.
@ Your voice recording was great. Yes, I can imagine it's not easy. I use an equalizer for listening ;)
No matter - it was a great video - Thank you.
I thank you Kevin. Have a great weekend.@@kevinu.k.7042
So you’re saying etfs with low expense ratios are just like index funds but the etfs with high expense rations are not?
Someone told me they would never invest in etfs and I’m like why? So I’m here watching this video
I think a broad market ETF is a very good decision for most people. One needs to understand that there are a lot of promotional products in this space too though and understand that ETFs in general are not flawless.
The only reason not to is if you are knowledgeable enough to do the work yourself. And even then, unless you are a superstar, you aren't likely to significantly surpass an ETF. You literally have to be able to find specific gold nuggets, and know when it turns fools gold.
A lot of the "I don't trust ETFs" is the same people that would take the controls from a pilot in an emergency, despite knowing nothing about flying. Control is a drug. Some would rather go down in flames than surrender control to an expert.
@@icecold9511 I think if we'd have an in-person discussion about this, we would agree on almost all the aspects that we'd address.
ETFs are great for the majority of investors. But not all ETFs are the same. That's the point of the video.
@
That much I figured out fast. Their tactics and target areas can be vastly different.
@but simple cap weighted etfs that track broad market indexes are basically the same as index funds that track the same indexes. The only real difference is etfs are traded on an exchange. I guess traditional index funds are better if you want to pound cost average every month for example, as doing that with an ETF will incur dealing charges on most platforms
Or perhaps you just don't know where exactly your information comes from.
Deceptive.