Posted by on Aug 12, 2016 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Christophe Vorlet

By Jason Zweig |  Aug. 19, 2016 12:10 pm ET

More than 1,900 exchange-traded funds offer almost every investing strategy you could think of — and many that might occur to you only if you were drunk. Maybe the manic innovation needs to stop, and the fund industry should go back to basics.

ETFs are diversified funds that trade on an exchange as if they were a single stock; they generally track a market index at low cost and high tax efficiency. You can use them to capture the performance of cocoa or livestock or palladium or the Singapore dollar, to hold water-related stocks with high dividends, or to earn twice the opposite of the daily return on gold-mining stocks trading largely in Canada. There isn’t yet an ETF that seeks to deliver triple the return of hotel companies traded on the Stock Exchange of Mauritius, but the year is still young.

Meanwhile, plenty of solid investing ideas haven’t been turned into an ETF. So here are some ETFs we’d like to see. Simple, serious and gimmick-free, they meet basic investment needs that otherwise would go unfulfilled.

The Rest of the Market Portfolio (ticker symbol: EXME) would be a set of ETFs that own the entire stock market except those in the industry you work in.

If you’re a software engineer, for instance, EXME.T, the Rest of the Market Ex-Technology, would own all U.S. stocks except computer and other high-tech stocks. The tech sector is roughly 16% of the market; that money would be shifted proportionately over the remaining industrial sectors, giving you extra exposure to aspects of the economy that should be stronger when the tech industry weakens.

Similarly, EXME.F, the Ex-Financials fund, would own everything but bank and other financial services stocks; EXME.E, Ex-Energy, wouldn’t hold oil, gas and related companies; EXME.H, Ex-Health Care, would consist entirely of stocks outside the medical field.

Just recall the havoc that can be wrought upon retirement plans when people over-invest in the industry they work in: Many employees at Enron were wiped out when that energy firm collapsed in 2001, a mistake repeated at such Wall Street firms as Bear Stearns and Lehman Brothers in the financial crisis. More recently, workers at oil and gas companies also invested aggressively in their own company and industry, raising risk to potentially dangerous levels. EXME would scale back those hazards.

ETF manager ProShares of Bethesda, Md., launched a group of four such funds last September, although so far they have garnered only a paltry $16 million combined. They deserve more.

The Whole Planet Portfolio (ticker symbol: ERTH) would package essentially every publicly traded stock and bond on Earth into a single convenient bundle. This fund would be an ideal gift for a young investor, who could hold it for a lifetime.

Such a portfolio, says Steven Schoenfeld, founder of BlueStar Global Investors, a New York firm that designs stock benchmarks, is “the natural evolution of the idea at the heart of indexing: to own the entire market.”

As of the end of 2015, the total value of the world’s stock markets was approximately $67 trillion, according to the World Federation of Exchanges; the combined value of global bond markets was nearly $88 trillion, reckons the Bank for International Settlements.

With a few simple tweaks, the fund could be built to consist of 60% stocks and 40% bonds, with less than half from non-U.S. markets. It would likely underperform U.S. stocks alone, but it would offer the benefit of exposure to every market.

Meanwhile, conventional bond funds offer diversification, but because (unlike bonds themselves) they don’t mature, they expose investors to the risk of market losses.

Own a U.S. Treasury bond maturing in 2024, and you can be assured of receiving 100 cents back on the dollar if you hold to maturity. Own a bond fund with a similar maturity, however, and you could easily lose money if interest rates rise between now and 2024. The fund’s holdings would fall in price. And, because the fund never matures and thus never returns all your investment principal, you have no assurance of coming out whole.

So Elisabeth Kashner, director of ETF research at FactSet, the investment-information firm, proposes a line of ETFs that would hold all their bonds to maturity. Similar to Guggenheim Investments’ BulletShares and iShares’ iBonds, these ETFs would “act more like a bond,” she says. Buy them and you would be virtually assured of getting back 100 cents on the dollar upon their stated maturity date (less expenses, inflation and any defaults).

A version of these funds — I suggest the ticker symbol TRGT for “target” — could hold municipal bonds issued within a high-tax state such as California or New York. If you wanted to set money aside this year for your newborn child’s college education, you could buy an 18-year TRGT fund consisting entirely of bonds issued in your state and maturing in the year 2034.

The bonds would accrue tax-free, and you would have effectively eliminated the risk of a price decline. Even if interest rates rise between now and 2034, you should get all your money back.

So instead of putting their energy into slicing the markets into ever-narrower niches and increasingly quirky risks, fund companies should think as broadly as possible about meeting investors’ basic needs. ETFs don’t have to be weird to be good.

Source: The Wall Street Journal,