Proprietary Data Insights
Top Sector-Specific ETF Searches This Month
A Primer On How To Spot ETFs You Should Avoid
As we continue our series on ETFs (go here for the most recent one and links to the entire series), The Juice looks more closely at ETFs that organize around a sector or theme.
It’s important to spot and understand the difference.
To help illustrate the difference, let’s start with an ETF that could very well be worth your time – the U.S. Global Jets ETF (JETS).
You Know Exactly What You’re Getting With JETS
First good sign. This ETF does not track the performance of the New York Jets. Rather, it gives you exposure to the global airline industry by attempting to mirror the movement of the U.S. Global Jets Index (JETSX).
Whether you’re bullish or bearish the global airline industry is up to you. But if you are bullish, it might make sense to go long JETS.
Because it’s super-focused. And, within that focus, nicely diversified.
However, to achieve this diversification management follows a pretty strict playbook. Because, remember, it’s mimicking an established index.
If you look at the holdings of JETS and the stocks that compose JETSX, they’re pretty much the same in name and position size.
Source: U.S. Global ETFs
There you have the top five holdings in the JETS ETF.
Here you have the top five names in the JETSX index.
Source: U.S. Global Indices
It’s when terms are broad and poorly defined. When fund managers have too much subjective leeway over what to own. Over which companies actually fit their ETF’s theme. Or when the theme itself makes for a murky and unclear, if not downright bad investment opportunity.
This is when you can run into problems, as The Juice will show, if you’d be kind enough to scroll with us.
ETFs To Stay Away From
Whereas JETS provides specific, though diversified exposure to a focused section of the stock market, other ETFs don’t just lack focus, they fall into the category of ETFs you probably should avoid.
For example, last week The Juice briefly mentioned Cathie Wood’s ARK Innovation ETF (ARKK) in our installment on making investing simple with ETFs:
The fund focuses on tech stocks with the potential for “disruptive innovation”, which means companies with products and services with the potential to “change the way the world works.”
That’s some lofty stuff! ARK’s performance: not so lofty. It’s down more than 60% over the last year.
In this case, not only does the manager have to stock pick, but they do so somewhat arbitrarily. They have to define something that’s incredibly subjective.
A quick look at how ARK describes itself tells you everything you need to know:
Source: ARK Funds
That’s all over the place. And ARKK’s horrible performance reflects this lack of focus.
It’s not to say you can never buy a fund where you put faith in a manager’s stock picks. Sometimes you can win. However, it adds another layer to your decision-making process.
When you see a manager stock picking around a poorly-defined theme, consider this a reason to hesitate. You have to have considerable faith in the person, not just conviction in whatever broad idea they’re floating.
Y’all Come Back Now, Ya Hear!
Same probably applies to an ETF that has sent papers to the SEC.
They want the ticker YALL. They want to be called the All-American ETF. And here’s how they detail how they’ll pick stocks:
The Sub-Adviser then screens out companies that, in the Sub-Adviser’s assessment, have emphasized political activism and social agendas at the expense of maximizing shareholder returns in the Sub-Adviser’s assessment. For example, the Sub-Adviser will generally exclude companies that make public statements about a then-current political hot button item unrelated to their business (e.g., companies that issue press releases in response to U.S. Supreme Court rulings).
A side of politics with your investing? Probably not a good idea.
The Bottom Line: Today’s installment ultimately comes back to a basic theme – keep it simple.
If you were going to pick your first two ETFs ever today, it probably makes sense to go as straightforward as possible with products that track established, broad stock market indices. So the SPDR S&P 500 ETF Trust (SPY) or Invesco QQQ Trust (QQQ).
From there, you take it into sectors you want to own, via ETFs that methodically adhere to the names in, again, established indices. This might mean JETS or something else entirely. It’s just that when you’re taking the risk of going sector-specific, you don’t need to add the quality of your fund manager’s stock picking skills to your list of concerns.
Any four of the names ahead of JETS on today’s Trackstar list of ETFs investors search for most make more sense than going rogue on an unfocused fund. That is, of course, if you like the sectors they run in.
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