I’m a stock picker and a firm believer that there are better and worse companies populating the S&P 500 and that if you have a clue as to which is which, you’re going to do much better than investors who rely on ETFs.
Laszlo Birinyi, head of Birinyi Associates, the widely respected investment advisory, agrees with me, as you can see in the excerpt below.
He says, rightly, that if you just avoided the banks and GE (which he justifiably considers a financial outfit), your returns would have improved upon the S&P 500’s performance by over four percentage points.
As you know, ETFs follow sectors (some pretty obscure) and not individual stocks.
Is there a difference between Exxon Mobil and Chevron? Between McDonald’s and KFC? Between Texas Instruments and Intel? You better believe it. My portfolios in the Global Wealth Insider invest in one but not the other of these pairings and these portfolios outperformed the S&P last year by a huge margin.
I’m not bragging. I’m merely saying there is value in picking stocks, even in highly correlated markets. From the Financial Times…
The growth, proliferation and popularity of exchange traded funds has had consequences not all of which are beneficial.
Today investors need no longer discern and analyse the differences between Exxon and Chevron since the Energy Select Sector ETF provides an opportunity to own both. And while the Technology Select Sector ETF, the short-cut to own S&P tech stocks, gives you both Apple and Google, you also end up with some MasterCard stock.
As might be expected, this has created more interest in group, sector and top-down approaches. No longer need investors analyse individual balance sheets or income statements. Instead, analysts focus on macro issues such as the price of oil, or the trend of consumer spending, while strategists and chartists detail correlations, sector rotation, and group movements.
Leaving aside the critical issue of whether ETFs truly track the intended group or basket (which too often they do not), the reality is that historically we have had limited information on group movements. Some stocks have been labelled “early market cycle”, which contends that they should be leaders in the early stages of a bull market. Foremost among these have always been small stocks that, the conventional wisdom holds, are sensitive to slight changes in the economy and can react quickly. Unfortunately, the data do not support this and only in the 1974 rally were small stocks in the vanguard.
Yes, ETFs are the safer route. But you pay for that with lower returns. It’s up to you to decide whether the trade-off is worth it.
Editor’s Note: Andrew Gordon recently identified three global stocks for the most aggressive income and exciting capital gain plays. You can lock in a 100% risk-free, subscription to his flagship publication Global Wealth Insider for $1 By Clicking Here!
