Welcome To The ETF Journey

May 14, 2019

As a relative old-timer in the ETF space, I sometimes find myself experiencing massive bouts of deja vu. It would be reasonable to think that, after 25 years in the biz, I might have covered most of the important topics, or run out of new things to learn. But honestly, nothing could be further from the truth.

Sure, I’ve been at it a while. And I’m sure some of you reading this have been using ETFs for years. But everyone has to start somewhere, and in a space that’s moving this quickly, and providing so much value for investors, there’s a sizable portion of our readership that’s quite new to ETFs.

There’s no greater evidence for this than our weekly ETF.com Live! Chats, which we mostly do on Thursday afternoons.

Week after week I’m reminded there are no “dumb” questions when it comes to ETFs. I’m glad when people ask me the basic questions. First, it means I probably know how to answer! But more importantly, it means there’s a person on the other end of the question who’s about to have their investment lives improved.

How’s that? If you’re an investor new to ETFs, you probably fit into one of these categories:

The Stock Picker

I talk to these folks literally every week. I used to be one of these myself. Heck, for the tail end of the dot-com boom, I sat on a trading desk as an actively managed tech fund manager (I’m feeling much better now, thank you).

As a stock picker, you’re highly focused on the individual stories behind companies. The narrative you’re following might be based on technical lines and patterns, or it might be based on talking to management and analysts, or it might be based on weekends spent reading financial statements and annual reports. But fundamentally, the stock picker is about stories.

As a class, we all know stock pickers lose, but there’s an emotional component to being a stock picker that’s hard to replicate. If you’re moving away from choosing companies, there’s a real temptation as a new ETF investor to “pick ETFs.” The problem with that mentality is that there’s rarely the same kind of narrative satisfaction.

ETFs, once you learn how they work, are actually pretty boring. That’s precisely why they work so well. While the good news is you’ve probably got the trading part down, you’re going to need another hobby.

The Hot-Hand Finder

While there are certainly far fewer folks day-trading stocks then there were in the mid-1990s, a huge swath of the advisor community is still in the business of picking mutual funds—particularly actively managed funds.

Much like the stock picker, as a hot-hander, you’ve got a system. Maybe you just lean on our friends at Morningstar. More likely, you’ve developed relationships with a few funds, a few firms, or even a few individual managers (or more likely, the wholesaler who comes in and presents on behalf of the manager).

You’ve had good years, where you feel like a hero talking to your clients or your golf buddies, and you’ve had bad years, which you’ve either suffered through or used as the opportunity to find a new hot hand.

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