Stuck In The Middle
No good product can long escape Wall Street's tendency for abuse, and such is the case for exchange-traded funds (ETFs).
ETFs have grown exponentially in a very short period of time and have been seized by savvy marketers hawking ETFs based on various "groupings." These are intuitively appealing to investors, but have no place in a portfolio based on rational, asset class investing. Some are bizarre, such as ETFs based on initial public offerings, while others are more conventional, including ETFs based on specific industries and commodities.
With the exception of REIT and gold-based ETFs, there are no funds based on industries or commodities that represent legitimate asset classes.
So-called mid-cap ETFs have proven popular. And the American Institute of Economic Research (AIER) recently examined the returns on the middle three quintiles of U.S. common stocks ranked by market capitalization. They concluded that while small and large-cap stocks have unique and therefore desirable risk and return characteristics, mid-cap stocks do not.
During the years 1926-2005, the median difference between the returns on the largest quintile and the smallest quintile was more than 13 percentage points. During eight out of ten 12-month spans during those years, the returns on the middle quintiles were somewhere between those of the largest and smaller quintiles. The other 20 percent of the time (when the returns on the middle three quintiles were outside the range between the first and fifth quintile) the median difference from the closer of the two remaining quintiles was only about two percentage points.
This suggests that there is little point in holding a "mid-cap" fund, especially when the portfolio contains funds that hold companies further down the list of companies ranked by size. Asset class investing takes advantage of dissimilar price movements, and in this respect, investment vehicles based on mid-cap stocks offer little value.
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ETFs have grown exponentially in a very short period of time and have been seized by savvy marketers hawking ETFs based on various "groupings." These are intuitively appealing to investors, but have no place in a portfolio based on rational, asset class investing. Some are bizarre, such as ETFs based on initial public offerings, while others are more conventional, including ETFs based on specific industries and commodities.
With the exception of REIT and gold-based ETFs, there are no funds based on industries or commodities that represent legitimate asset classes.
So-called mid-cap ETFs have proven popular. And the American Institute of Economic Research (AIER) recently examined the returns on the middle three quintiles of U.S. common stocks ranked by market capitalization. They concluded that while small and large-cap stocks have unique and therefore desirable risk and return characteristics, mid-cap stocks do not.
During the years 1926-2005, the median difference between the returns on the largest quintile and the smallest quintile was more than 13 percentage points. During eight out of ten 12-month spans during those years, the returns on the middle quintiles were somewhere between those of the largest and smaller quintiles. The other 20 percent of the time (when the returns on the middle three quintiles were outside the range between the first and fifth quintile) the median difference from the closer of the two remaining quintiles was only about two percentage points.
This suggests that there is little point in holding a "mid-cap" fund, especially when the portfolio contains funds that hold companies further down the list of companies ranked by size. Asset class investing takes advantage of dissimilar price movements, and in this respect, investment vehicles based on mid-cap stocks offer little value.
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posted by Bob Moser at
8:51 PM
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