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ETF Mania, or: A Study in Herd Behavior
Nestled on page B11, in this weekend’s Wall Street Journal was an article, “Social” Funds Embrace Emerging Markets. One of the fads that’s irked me for some time is Socially Responsible Investing. Surely, that must go against the whole capitalist ethos, no?
What does Socially Responsible Investing even mean? And I don’t mean
the wikipedia definition. I mean, you’ve got 30 secs to explain it to
me........... go!
Uh huh, thats what I figured. Sounds good though, right? All you
need is a prospectus plastered with an image of giggling children
frollicking in a field of daisies, under a sun filled sky et voila!
This whole ETF and theme-based fund frenzy is really starting to get out of control.
This one fund in particular, the MMA Praxis International Fund,
aims for 20% Emerging Markets exposure, screening for companies that
produce alcohol, tobacco and weapons. Therefore, mining and sweatshops
that employ cheap efficient labor have a free pass.
Talk about coming to the party late and with nary so much as a cheap
bottle of plonk. While procrastinating over how the write and research
this post, along comes the WSJ with Here Comes The Dumb Money (hat tip stonestreetadvisors). Gee, I wish I’d thunk o’ that title.
Because over the last year, the MSCI Emerging Markets Index has risen over 35
And since 2008 over 142% - Not to also mention that HUMONGOUS Volume spike during Sept of last year!
And, inflows for the week ending Jan 14th 2011 show that the leading Emerging Markets ETF,
Vanguard’s Emerging Markets ETF (VWO) was once again among the ETFs
with the highest inflows ($840mn). Admittedly, the iShares MSCI
Emerging Markets Index (EEM) was among the ETFs with the highest
outflows (-$1.1bn).
However, I believe the outflows from EEM has more to do with cost of
VWO (ubercheap), and EEM lagging the MSCI Emerging Markets Index.
Perhaps, lately a third reason - How EEM is structured.
VWO uses a replication strategy (it seeks to own as many of the
underlying stocks in the index as possible), holding as many as 800
stocks. EEM on the other hand uses a sampling strategy designed to
deliver the index’s returns without owning all the securities in it and
then “optimizes” - a not-so-clever euphemism for backing the truck up
on derivatives.
Understanding ETF methodologies is an important criteria that is
often overlooked by both professional and retail investors. Of the
roughly 1,200+ (numbers change frequently with additions and closures)
ETF and ETNs that can be traded, maybe 75 are truly understood and should be traded.
The rest are an exercise in futility, pandering to the masses desire for an investing elixir.
This is all part of the greater trend of investors missing out on a
rally, and getting into the latest fad/innovation to jump start gains.
Ordinarily, you would chuckle at the "dumb money", but plenty "smart"
money gets in on the act too.
You’ll know we hit bottom when there is an art mutual fund/ETF or worse an ETF that allows investors to Put Money on Lawsuits to Get Payouts. Look carefully before you leap.
Happy Trading!
@macrotradr
Stone Street Advisors - www.stonestreetadvisors.com
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Don't get me started with "socially responsible investing." However, if that course is what some chose to pursue, then of course, underperformance is always their prerogative.
Good piece, Anal_yst.
+1
Socially responsible investing. Bwhaahaahaa
So true, as you note Anal_yst, that most of the ETF/theme based fund crap doesn't meet the simple standard of capital responsible investing. How can one have socially responsible anything when there isn't capital responsible activity backing it up? A terrific reflection of far more than the ETF/theme based fund crap.
Good to see you contributing more broadly to the discussion here Anal_yst. Cheers
microlending to women has a pretty good track record with good returns. they only lend to women as they are more responsible in paying back. men just get the money and go get drunk. true story. There are some big private funds in microlending around the world. hundreds of millions, possibly billions in aggregate.
The banksters sell socially responsible investing to the sheep so when you lose your money you don't feel as bad as you are helping the planet or some third world (while actually giving the bankster a new bentley, hehe)
I think one argument is that when you say you're not going to buy tobacco/weapon/alcohol/etc companies, but don't have a problem buying mining companies or firms who use questionable practices (who do you think picks all those tomatos Dominos Pizza brags about being grown in the US? Not US Citizens.) is a bit hypocritical and generally freaking stupid. The point of running $ is to make as much of it as possible, not change the world to how you think it should be.
I want an etf that tracks the future cost of aaa bbb and junk grade hookers
Idiot does what idiots do.
http://www.weirdpalace.com/img/fun/good-timing/good-timing125.jpg
But who says you can't go against the crowd and be the only surviver :)
http://babaloud.com/wp-content/uploads/2011/01/mexico_crash.jpgSimple: do no evil.
And it does not have to be complex and does not have to be stupid: you can for example follow a policy to never go long in companies you consider 'evil enough' - if then only do short positions. Tobacco companies for example and other companies that kill people intentionally. Or BP if you care about the environment - etc.
Whatever your notion of 'evil' is - you can avoid companies that do that sort of stuff as a business.
If you are a libertarian you can follow a short-only policy for companies ran by ex central bankers, and you can follow a "only go long in gold" policy :-)
It does not have to dominate your investments and you dont have to put all your eggs into some stupid 'socially aware' ETF - but just a little bit of social consciousness might have a material effect if tens of thousands or perhaps millions are doing it - in the far future.
It's like pledging to buy non-sweatshop clothing, you practically can't do it.
Not that hard actually. If you have money to invest, you definitely have money for sweatshop-free clothing. Super-easy and lots of stuff out there to choose from.
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Socially-responsible investing tip #1: Buy local.
Socially-responsible investing tip #2: Start/help someone start a business that makes something useful. Might I suggest clothing. Hire your unemployed neighbors -- they'll work cheap.
Not rocket science.
If people want to stop feeding the beast, just stop feeding the beast. If people think they should be able to stop feeding the beast AND turn a tidy profit without doing any real work, or producing anything of real value, they're morons.
I can certainly very easily avoid going long in tobacco companies. (And I happily short them when the opportunity arises.) Same for BP.
Is it a problem for you to avoid them?
It's all "Sold to You" whether you are a libertarian or not.