Two ETFs Suggesting Trouble for Advisors: EQAL, AOR

Are clients losing patience with their advisors? If so, are they sharing their frustration, or doing a slow burn?  

If the latter, advisors would do well to identify those emotions before hearing from the back office that transfer documents were submitted.

While I didn’t lose clients often during my 27 years as an advisor, he departures that hurt the most were those who left without offering an explanation.  

They were in the books one day, with regular meetings filled with a lot of head-nodding and apparent satisfaction. In a flash, they were gone. Since my practice was investment-based, more than financial planning-driven, it was investment-related items that were always priority.  

That included being proactive with clients about anticipating or unearthing potential stressors that might not even show up in performance or regular communication. I’m talking about fear of missing out (FOMO), but also about what causes FOMO. Because very often, FOMO is the result of solid portfolio and financial planning.  

That strange statement deserves an explanation. And two ETFs I track closely—the Invesco Russell 1000 Equal Weight ETF (EQAL) and the iShares Core Growth Allocation ETF (AOR)—may be the best ways to deliver that explanation.

The Average Stock Isn't in a Bull Market!

Consider that in the behemoth SPDR S&P 500 Trust ETF (SPY), the top 10 holdings currently account for 35% of assets. But in EQAL, which equal weights by sector and essentially represents the performance of the average of the 1,000 biggest US stocks, the top 10 holdings are under 6%. Translation: the more crowded the stock market gets at the top, the more investors want in. And that leads to FOMO for some clients of advisors who have chosen the prudent, but less profitable past recently, of not skewing stock portfolios to a small number of giant companies atop the S&P 500 index.

That might explain why EQAL’s assets, at $595 million, are roughly three zeroes shy of SPY, which had $561 billion at last count. And, why clients with stock portfolios where weighting is more equal and less driven by market capitalization are feeling the FOMO.  

One way to characterize this is as follows: the U.S. Presidential Election takes place Nov. 5. If EQAL were to fall just 1.5% between now and Election Day, it will complete a three-year period in which its return is zero. That includes dividends. In other words, it's just short of three years of nothing. That could be felt in client portfolios which are not “FAANG-ed up” so to speak. SPY is up 23% since that starting date of November 5, 2021.

AOR is not A-OK!

The $2.1 billion AOR is a great proxy for the classic (and in my view way overrated) 60/40 portfolio. Many advisory clients end up in portfolios that resemble what AOR tries to do. And since that mission includes diversification among stock styles and a heavy dose of intermediate and long-term bonds, the past few years have not been kind to 60/40 and AOR.  

That ETF has managed just a 6.3% total return since that same November 5, 2021, starting point, and nearly all of that is from dividends. So, no price appreciation. Or, more accurately, the modest allocation to SPY-like exposure was wholly offset by the other stocks and the bonds. AOR is still up a solid 7.3% annualized for the past five years, but SPY is up 15.8% over the same time frame. FOMO shows its ugly face again.

Advisors do themselves a big favor when they can characterize and specify what is going on in markets and put it in perspective for clients. The multi-year lags in EQAL and AOR are a pair of educational opportunities they can use to prevent “silent exits” from clients.