Thursday, June 15, 2017


Chief investment officer David Swensen has averaged a 16 percent annual return on Yale University’s investment portfolio, which he built with everything from venture capital funds to timber. He’s been called one of the most talented investors in the world. But lately he’s becoming perhaps even more famous for his advice to individual investors, which he first offered in his 2005 book Unconventional Success. “Invest in nonprofit index funds,” he says unequivocally. “Your odds of beating the market in an actively managed fund are less than 1 in 100.”
And there’s more. A recent entry on the Motley Fool, the popular investment advice website, made the following blanket statement: “Buy an index fund. This is the most actionable, most mathematically supported, short-form investment advice ever.” As long as 10 years ago, in his annual letter to his shareholders, Warren Buffett advised both institutional and individual investors “that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” (Ritholtz)
ETFs are beginning to dominate investing. Part is cynicism; people do not believe in experts much any more. And this looks to be true if one follows the performance of individuals who pick individual investments. Generally, no one leader in individual stock investing repeats; the exceptions--like Peter Lynch--are just prominent enough to fool us. is never easy.

ETFs hold baskets of underlying securities and trade throughout the day like a stock. Most track an index and stray little from their net-asset value, or NAV. But heavy trading and market volatility can compromise that consistency.

Recently, as trading in the three biggest credit ETFs approached record levels amid the market’s biggest losses since 2008, the ETFs’ shares dropped as much as 1.1 percentage point more than the net value of the securities they hold. During that period the two largest high-yield bond ETFs have lost about 6 percent—2 percentage points more than the loss for the Bank of America Merrill Lynch U.S. High Yield Index that they’re supposed to track.
So, in fast-moving markets, the price of your ETF may disconnect from the price of the assets it holds. That is to say, worth less than the sum of its parts.

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