Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18
Trump Sounds End Times Armageddon Trumpet for Jerusalem, Israel Evangelical Prophecies - 16th May 18
Our Next Stock Market Dow Fibonacci Price Targets – Get Ready! - 16th May 18
The Coming Copper Crunch - 16th May 18
Stock Futures Are on a Sell Signal - 16th May 18
What to do When the IRS Comes for Your Property - 16th May 18
IS BITCOIN ANONYMOUS? - 16th May 18
Bitcoin Tide Might Have Turned - 15th May 18
UK Online Gambling Market Grows According to UKGC - 15th May 18
Stock Market Study: What Happens Next when Dow Goes Up 8 Days in a Row - 15th May 18
Fibonacci Price Ladder Points to Higher Stock Prices - 15th May 18
U.S. Dollar Rally Is Doomed - 14th May 18
Gloomy Scenarios for the Fed That Should Boost Precious Metals - 14th May 18
US Dollar One Reversal Too Many - 14th May 18
SPX futures are higher, but so is VIX - 14th May 18
Precious Metals and Miners NUGT – The Sleeping Giant Trade - 14th May 18
Is This The Netflix Of Cannabis? - 14th May 18
US Quest for Iran Regime Change: Will EU Sustain the Nuclear Deal - 14th May 18
Stocks Bears Last Stand - 14th May 18
Stocks Bear Markets Don’t Start when Real Interest Rates are this Low - 13th May 18
Stocks and Bonds Still Only 1 of 3 Macro Amigos to Destination - 13th May 18
Silver Forecast 2018 and Beyond, Investing for the $35+ Price Spike! - 13th May 18
Study: Breadth is Leading the Stock Market Higher. A Bullish Sign - 12th May 18
Ways on How to Get An LLC - 12th May 18
Kanye Is Right: Slavery Is A Choice And We're All Slaves Today - 12th May 18
Trump’s Iran-Decision Did-not and Won’t Affect Oil Prices - 12th May 18

Market Oracle FREE Newsletter

Trading Lessons

If You Hold VT Or Any Other Global ETF, You’ve Put All Your Eggs In One Basket

Companies / Emerging Markets Jan 08, 2018 - 03:38 PM GMT

By: John_Mauldin

Companies

BY OLIVIER GARRET : The growth of ETFs since the Global Financial Crisis has been staggering.

Total ETF assets under management is now approaching US $5 trillion, a 400% increase from the $1 trillion held in 2009.

Investors now have access to over 7,000 ETF/ETP products. To put that number in perspective, there are only 2,400 stocks listed on the New York Stock Exchange.



Source: Moneyweb

This year, there has been no stopping the ETF train. Along with S&P 500 index trackers, global stock market ETFs have received extraordinary capital inflows.

The Vanguard Total World Stock ETF (VT) is one such fund.  

Perhaps investors are under the impression that VT and other global stock market ETFs will “diversify” their portfolios away from expensive US equities. 

This would make sense in theory, as an allocation to global equities should reduce portfolio risk.

However, the truth is, ETFs such as VT offer very few diversification benefits (learn more in an exclusive ETF special report from former ETF head at Lehman Brothers Jared Dillian, which you can download here).

The chances are, if you hold VT or other similar investment vehicles, you’ve most likely increased your portfolio risk, instead of decreasing it.

Here’s what you need to understand about VT.

Unhealthy US Exposure

For starters, while VT is meant to be a “global” index, in reality it’s heavily skewed to US equities.

Currently, over 50% of the index is allocated to US equities. In contrast, Europe and the UK have weightings of just 10% and 6% respectively.

The top 10 holdings are all US-listed stocks. In fact, there are only two non-US stocks in the top 20 holdings - Tencent Holdings and Nestle.


Source: ETF

It’s a similar story with the iShares Global 100 ETF (IOO). This “global” ETF has a 61% weighting to the US.


Source: ETF

While these overweight allocations to the US look dangerous at portfolio level, the problem is made worse by the US market’s unsustainable valuation right now. 

The S&P 500 trades at a forward-looking P/E ratio of 18.3, according to Factset. In contrast, the UK’s FTSE 100 index and Europe’s Stoxx 600 index currently trade on ratios of 15 and 15.6 respectively.

The result is that investors are heavily overexposed to one of the most overvalued stock markets in the world.

This goes completely against conventional investment wisdom. Buy low and sell high? These global trackers are doing exactly the opposite.

Lack of Emerging Markets

VT and IOO are also seriously underweight the emerging markets. To give you a quick example, here’s a chart of the VT ETF breakdown by market.


Source: ETFdb

As a global investor, wouldn’t you want a significant allocation to these growth regions? After all, emerging markets as a whole are growing at twice the pace of developed economies.

VT and IOO are over exposed to slow-growing developed countries, and under exposed to the world’s fastest-growing economies.

For example, countries such as China and India make up just 2.6% and 1.2% of VT’s portfolio respectively.

Overexposure to FAANGs 

But it’s not just country weightings that look unbalanced.

VT also has unhealthy sector weightings. Like the S&P 500, it’s way too overexposed to the tech sector.

It’s the same old familiar names at the top of the index - the FAANGs.

In the same way that Apple, Amazon, Facebook and Google dominate S&P 500 ETFs, these companies also dominate the world index. Between them, they make up almost 5% of the index.

It’s even worse with IOO. As the more concentrated ETF, holding only 100 stocks, Apple, Amazon and Google make up over 15% of the portfolio.

I don’t need to remind you how overpriced some of these stocks are.

Overall, it’s quite clear to see that there’s a serious diversification breakdown here.

Which brings us back to the same problem.

Everyone Owns the Same Stocks

ETFs have distorted the market. Investors have forgotten how to look for value, and have instead just bought the whole market. The result is that every portfolio now contains the same overpriced stocks.

The issue is that as a product of the last decade, ETFs are largely unproven in major market volatility. While capital has flowed into ETFs in a relatively orderly fashion, we have no idea how these products or indeed, the market will fare if investors all want their capital back at once.

Investors Became Lazy 

Investors need to go back to basics, and refocus on fundamentals and value. That’s ultimately what generates alpha.

Determine your ideal geographic asset allocation, and select ETFs that are properly diversified.

Look at the emerging markets for long-term growth, or consider undervalued areas of the market such as Europe. Gold is another asset class that could offer diversification benefits.

Rebalance your portfolio regularly.

In times of record-high valuations, risk management is now more important than ever.

Free Report: 5 Key ETF Trading Strategies Every Investor Should Know About

From Jared Dillian, former head of ETF trading at Lehman Brothers and renowned contrarian analyst, comes this exclusive special report. If you’re invested in ETFs, or thinking about taking the plunge into the investment vehicle everyone’s talking about, then this report is a clever—and necessary—first step. Get it now.

John Mauldin Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules