Advisors Take Note: These ETFs Were Not Fooled in April

April was a down month for U.S. stocks, with the SPDR S&P 500 Trust ETF (SPY) declining by 4% and the Invesco QQQ Trust (QQQ) falling by 4.5%. But elsewhere, there were flowers in April, not showers.  

And they bloomed from a variety of ETF styles and regions, showing yet again that if for no other reason, investment advisors should be devoting research time to this investment vehicle. It also provides some reminders to advisors about how best to assess the impact any single ETF position may have on client portfolios.  

Commodity markets tilted higher during the month, and that helped several individual commodity ETFs. For instance, the $1 billion Global X Silver Miners ETF (SIL) flew higher by 16%, turning positive for the year. The 37-stock portfolio is highly concentrated, with 50% of assets covered by only five stocks.  

While “standard” diversification views in our industry would see that as a risk, I strenuously differ in my opinion. Using SIL as an example, advisors can ask themselves, “how much of a client’s portfolio allocation would I likely put into this ETF?” The answer is likely no more than 10% in most cases.  

For example, if 50% of 10% of assets was plugged into “only” five stocks, that’s merely 5% of the portfolio across those five names—in other words, less than many typical stock position sizes.  

Diversification is a great investment concept if it is not taken too far. Although SIL had a strong month in April, the longer-term question is how much risk is being taken to pursue the return objective of the client. If we look at it from the opposite angle, allocating that 10% to an ETF with 200 stocks, equally weighted would render any single stock useless in its ability to impact the total portfolio return.  

April’s Falling Tide Lifted This BOAT 

The $47 million Sonic Shares Global Shipping ETF (BOAT) rose 8% in April, as the water transport stocks in this portfolio followed a flat first quarter with a surge in price similar to that which made it one of the better late 2023 performers in the ETF space. Its portfolio is still selling at under seven times trailing 12-month earnings, even after the April tide lifted this BOAT. 

From the “Bet You Didn’t Know” Department 

Which would advisors and their clients find more surprising:  

• That the iShares MSCI India Small-Cap ETF (SMIN) rose 7% during April? 
• That this ETF has over $900 million in assets and has been listed for more than 12 years? 
• That an ETF devoted to small cap stocks based only in India even exists? 

Well, all are true. And as with the other two ETFs discussed earlier, it serves as another reminder for advisors that the U.S. stock market is not the only place to look for value and opportunity.