FedEx Earnings Offer ETF Investing Lesson

FedEx Corp. didn’t deliver what was expected in its latest earnings report, but ETF investors didn’t end up with a broken package. 

It is single-stock implosions like these that remind ETF investors why this nearly $9 trillion security type is providing a higher level of security to investment advisors and their clients, as well as to self-directed investors.  

Diversification is referred to as the only free lunch on Wall Street. But investors are prone to forget that during periods of rapid stock price acceleration, such as we’ve had since the end of October. 

A rally of more than 15% in eight weeks for the SPDR S&P 500 Trust (SPY) inevitably sparks renewed interest from less-seasoned investors. That makes them prone to the other side of the boom-bust cycle. And when stocks go bust, it can turn an investing process into an emotion-driven cyclone if no guard rails are in place. 

'FedEx' ETFs

Exchange-traded funds have been solving that problem in a variety of forms for 30 years now. FedEx’s stock was down 10% Wednesday afternoon off a bad earnings report and reduced sales outlook. That put the diversification effect of ETFs on full display. According to etf.com’s stock finder tool, 229 ETFs own FedEx’s stock among their holdings. 

Importantly, that stock is no more than 5.3% of any ETF, that weighting being within the ProShares Supply Chain Logicstics ETF (SUPL), which has only $2 million in assets. A more prominent FedEx holder is the iShares US Transportation ETF (IYT), a $952 million fund that had a 4.5% weighting in the stock prior to Wednesday’s decline. 

FedEx was the sixth-largest holding in IYT and will still be well inside the top 10 even with the drop in FedEx’s share price. That shows one can access the stocks they like through an ETF but with plenty of cushion. And, unlike mutual funds, most ETFs disclose holdings every day and are based on an index, which has specific rules about when holdings are reviewed and rebalanced.  

This “know-what-you-own” aspect of ETFs, combined with that cushioning effect, makes days like Wednesday a no-sweat event for ETF holders. IYT was down 0.36% as of midday, essentially blowing right by the double-digit percentage decline in one of its biggest holdings. 

Now, diversification can be taken too far. If the investor or investment advisor’s goal is to target a small group of peer stocks, say in a sector or industry, there are many ETFs that deliver that. But there are also many choices that diversify to the point where even a large group of stocks has little combined influence. 

The FedEx earnings announcement may have been a shock to investors heavily invested in that single stock. But it reminds us that ETFs offer a shock absorber that is as valuable as ever in a stock market that has seen huge swings each of the past four years.