The Wall Street Journal recently ran a series of articles contending
that most investors could achieve better returns using
Exchange-Traded-Funds (ETFs) to track market indexes than by picking
individual stocks.
That’s probably so, but you could substantially outperform most ETF
investors by avoiding the most popular ETFs. Here
are the details.
Overall Market
The S&P 500 index, which tracks 500 large-capitalization stocks
(largest companies in terms of value of shares outstanding),
is, arguably, the most widely watched market gauge. Thus, it figures
that the SPDR S&P 500 ETF (SPY), which tracks that index, is the
most popular ETF, trading more than 100 million shares daily.
The last time I checked, the S&P 500 fund
had returned 5.4% over the past year, 9.0%, on average, annually,
over the past three years, and 14.1% over five years.
However, large-cap investors would have done better using the
lesser-known iShares Morningstar Large-Cap ETF (JKD), which tracks
an index of 75 U.S.-based large-cap stocks. This fund, which trades
only 15,000 shares daily, returned 8.5% over the past year, 9.5%, on
average, annually, over the past three years, and 15.5% annually
over five years.
Small Cap
Stocks
Stock prices typically track earnings growth and small-cap stocks
often offer faster earnings growth potential than larger, more
established firms. The iShares Russell 2000 ETF (IWM), which tracks
the Russell index of 2000 small-cap stocks, trading 31 million
shares daily, is the clear choice for most small-cap investors. How
have they fared? Not bad, but nothing to write home about either.
The fund returned 6.0% over the past 12-months, and 4.3% and 12.9%,
on average, annually, over the past three and five years,
respectively. But consider the WisdomTree Small-Cap Dividend Fund
(DES) that tracks an index of more than 600 U.S.-based dividend
paying small-caps. This fund, trading less than 100,000 shares
daily, returned 12.0% over 12-months, and 6.3% and 14.3%, on
average, annually, over three and five years.
Technology
When it comes to growth, technology is where it’s at, and for tech,
most investors turn to the PowerShares QQQ (QQQ). It tracks the
Nasdaq-100 Index of the 100 largest non-financial stocks trading on
the Nasdaq. The QQQ, which trades 29 million shares daily, is no
slouch, having returned 6.9% over 12-months, and 14.3% and 17.2%, on
average, annually, over three and five years.
Compare those returns to the First Trust NASDAQ 100 Tech Sector ETF
(QTEC), which tracks only 36 mostly U.S.-based tech stocks, and
trades less than 50,000 shares daily. This fund has come on strong
recently, returning 18.0% over the past year, and 17.2%, on average,
annually, over the past three years. Its five-year annual returns
totaled 16.8%, slightly short of the QQQ’s 17.2% number.
In the Chips
Finally, if you’re looking for another hot tech sector, check out
the PowerShares Dynamic Semiconductors Portfolio (PSI), which tracks
30 U.S.-based semiconductor stocks. This fund, which trades only
22,000 shares daily, has returned 26.3% over the past 12-months and
124.3% and 19.1%, on average, annually, over the past three and five
years.
As usual, past performance doesn’t predict the future. Watch the
news and sell funds when their industry sector is moving out of
favor.
published 11/2/16
