Why ETFs

  Embarrassingly our ETF portfolio has been outperforming our other portfolios (written on 17th February 2021). It is a revelation that this low-cost, low activity, low stress, low administration, relaxed portfolio, exposed to compounding returns in the Australian market as well as the HACK, FANG, FUEL and S&P 500, is outperforming our Australian stock picking in the Growth portfolio as well as the income stocks in the Income portfolio. Here is the performance chart of the ETF portfolio. ETF model portfolio performance Now please understand that this is a hypothetical portfolio that made a few assumptions about going to cash when we went to cash in the growth portfolio. So it has the same/similar “big calls” on the "Cash versus Equities" equation that we made in our other portfolios. So the performance is fantastic. But it's hypothetical only and we didn’t actually do that, so let’s not get carried away. But the point I’m trying to make today is that whilst we have been fully invested, since August last year, after the big cash calls were reversed around August 1 last year, the ETF portfolio is up 15.52% compared to the Growth portfolio up 13.27%, the Income portfolio up 11.05% and the ASX 200 up 16.7%. A few observations:
  • As a fund manager, I can tell you that it is not easy to outperform a compounding index which is, after all, a fantasy with its costless index replication, perfect costless dividend reinvestment, no humans, no fees – it’s not realistic - I am staggered that we have allowed the industry to be benchmarked to it and used for underperforming – but, as they say in The Mandalorian, “This is the Way”.
  • ETFs allow you a very low cost “as perfect as you can get” exposure to a compounding ASX index.
  • ETFs also effortlessly, by clicking the same buttons that you would click on an Australian stock, at no extra commission, allow you exposures to not just a compounding ASX index, but to compounding international indexes and many other inaccessible combinations.
  • Waking up to ETFs is something the US did 10 years ago. As one of my former colleagues (Remember Sam?) can tell you after his visit to the Berkshire Hathaway AGM some years ago, a US broker said “Oh, you’re Australia. I bet you’re still dealing in individual stocks and charging commission”.
  • ETFs perfectly suit financial planners. Wealth Management in the US is all about ETFs and asset allocation using ETFs. It is long-term, low cost, low stress and cheap. But some most of our financial planners are still using illiquid managed funds and/or doing individual stock picking. In the US stock picking is a minority sport for traders, not investors.
  • Stock picking, by comparison, is a lot of work and stress.
  • Stock picking is riskier. The out performance from stock-picking usually comes by getting one or two stocks absolutely right – rarely from getting “most” of them right. To catch those one or two stocks you have to take a fair bit of risk (large holdings in growth stocks).
Please note – I am not motivated (yet) to sell you on ETFs, quite the opposite in fact, and I don’t like the idea that I am promoting the ETF industry quite honestly, that's their job not mine, and the truth is that if you find stock-picking enjoyable, you are successful at it, it’s a hobby, an intellectual pursuit, you will find ETFs very boring. So don’t let me for a moment persuade you to give up your stock picking activities. But for those who really aren’t interested in investment, who maybe found themselves stock-picking just because they set up an SMSF but don’t enjoy it, don't want daily investment activity, want boring, are long term, like the idea of compounding returns, and, in Australia, want access to exposures outside Australian equities, then ETFs serve a purpose. To cater to those that like the idea of low cost, long-term and boring, yes, we are still in the process of setting up an ETF SMA. But the point today is that just because ETFs are boring doesn’t mean they don’t perform and our experience is that if, for all the stress and involvement of stock picking for the growth portfolio, the returns are similar and the stress is less, we continue to be motivated to set up this ETF SMA. This is the current MARCUS TODAY ETF PORTFOLIO Marcus Today ETF Portfolio We haven’t made a change since November yet we are still capturing the bull market nicely. And we don’t wake up every morning wondering whether a stock we hold is going to blow up. It makes stock-picking look “So 2010”.

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