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The Stock Market Woodchipper

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By Gustavo @ Adobe Stock

There’s a lot of slicing and dicing going on in today’s markets. When you have more ETFs than stocks to buy, that’s a problem. In The Wall Street Journal, Jason Zweig wonders if there’s any asset left to make an ETF out of. He writes that “Good new investing ideas are getting harder to come by.” He continues:

Giant firms like Apollo Global Management, Blackstone and KKR, whose private-equity funds invest in corporate buyouts, would love to launch ETFs. That would enable them to wrap their expensive strategies in a cheap package, creating a potentially vast new source of demand. This week Apollo announced it’s developing an ETF with State Street Global Advisors that will hold nontraded bonds.

“There’s a list of financial assets that people are interested in, but [some of these] markets are difficult to get exposure to,” says Deborah Fuhr, founder of ETFGI, a research firm in London. “Efficiency is one of the challenges.”

An ETF works well if its holdings trade transparently and frequently, so investors know exactly what’s in the fund and what the market says it’s worth moment-to-moment. That’s all but impossible with buyout funds that hold entire nontraded companies.

“If you’re trying to put illiquid s—in an ETF, it’s never going to work,” says Wesley Gray, chief executive of Alpha Architect, a firm in Havertown, Pa., that helps asset managers launch ETFs.

He adds: “We don’t see a lot of true innovations, man. If you want to put triple-levered Zimbabwe swaps in an ETF, that’s not innovation.”

ETFs already invest in some offbeat stuff: pet care, loans to veterans, stocks traded by members of Congress, companies aligned with biblical values, a portfolio that does the opposite of whatever TV pundit Jim Cramer recommends.

Fifty-two ETFs are linked to the returns of only one stock, according to FactSet, including 10 tied to Tesla and nine based on Nvidia. One ETF seeks to deliver twice the opposite of each day’s return on small gold-mining companies. Another aims to double the daily gains and losses from a bundle of cannabis stocks.

Action Line: With all the oddball funds being created, it’s beginning to look more like the market went through a woodchipper than if it were sliced up by a master chef. Make sure you’re investing with a philosophy that you can believe in and that you will be comfortable with through thick and thin. When you want to talk about building a portfolio of individual securities for you, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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