There were 115 new ETFs launched in the first quarter of this year. Sumit Roy wrote about four of the most interesting ETF launches. I was fascinated with each of them—especially the first three.
Here is a summary of each and why they have far more potential than ETFs I typically recommend. (Hint: That’s not to say I’m buying them.)
- Grayscale Future of Finance ETF (GFOF), 0.70% ER. Passively managed to track a market-cap-weighted index of global stocks identified as shaping the “future of finance.”
- VanEck Digital India ETF (DGIN), 0.75% ER. Tracks a market-cap-weighted index of Indian companies that are involved in the digitalization of India's economy.
- ROC ETF (ROCI), 0.49% ER. An actively managed fund of 75 to 150 large cap U.S. companies that are led by CEOs considered to be of high character as defined by the issuer. ROC stands for “return on character.”
- BondBloxx USD High Yield Bond Consumer Cyclicals Sector ETF (XHYC), 0.35% ER. Tracks a modified market value-weighted index of USD-denominated, high yield corporate bonds of any maturity, issued by companies in the consumer cyclicals sector.
I think these ETFs are each brilliant in their own way. Who wants to invest in yesterday’s finance companies when you can buy just the companies that have a robust future in finance (GFOF)?
With India’s fast-growing economy, who wouldn’t want to target just those companies in India leading the digitization of India and the world with DGIN?
Vanguard founder John Bogle wrote a book called Character Counts, so ROCI gives us the ability to buy companies whose leadership has demonstrated high character. And who wouldn’t want a bond right now with a 5.40% yield?
Each of these has a reasonable chance of ending up in the top 10 in terms of performance in their respective categories—certainly a much better chance than my three core ETFs, which include a total stock fund (VTI or ITOT), a total international stock fund (VXUS or IXUS) and a total bond fund (BND or AGG).
Why You Should Avoid Them
These new funds appeal to my emotions far more than my boring broad index funds, and that’s precisely the primary reason I won’t be buying them.
The logic of the first three is very compelling, though not unique, meaning the underlying stocks are already priced in with this knowledge. High yield bonds are just rooted in greed, and the term “junk bonds” is one of the few Wall Street terms I think is accurate.
All four have two other things in common as well. They are expensive, with each one having an extra digit in expense ratios over my boring ETFs. They are also very narrow, targeting very specific areas of the markets. This means they are taking a ton of uncompensated risk.
While these four funds have a much greater chance of ending up as a top performer than my broad index funds, they also have an even better chance of ending up in the bottom 10.
While I think the strategies are brilliant, I don’t think brilliance translates into great investing. I’ve known some brilliant people who are leading many of the worst funds around.
I define investing in eight words:
Minimize expenses and emotions; maximize diversification and discipline.
These four new ETFs fail my definition miserably. And as Warren Buffett put it:
The greatest enemies of the equity investor are expenses and emotions.
I suspect Buffett would also avoid these like the plague.
So here are my predictions: If any of these four new ETFs does well, money will pour in. It’s possible one could become the next hot ETF, like the ARK Innovation Fund (ARKK), which attracted billions of investor money just in time to turn icy cold.
A more likely scenario is that one or more of these new ETF will flame out early after poor performance. Of course, the issuers of these ETFs will then launch new ones just as enticing to replace the failed ones.
Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.