Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

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

© 2005-2019 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