mYCharts - May 19, 2020
The Growing Complexity of ETF Investing with Nate Geraci
FEATURING: NATE GERACI
Completely cherry-picked date, but broad emerging markets have delivered a NEGATIVE TOTAL RETURN since just prior to Global Financial Crisis (Oct 2007)… pic.twitter.com/VBqm6AMBYj
— Nate Geraci (@NateGeraci) May 13, 2020
Q: Tell us about yourself and the ETF Store. What is your approach to financial planning and wealth management?
A: At the ETF Store, our approach can be boiled down to being comprehensive and behavioral-focused, while minimizing the frictions of investing, whether they be costs, taxes, or other drags on returns. If investors take a holistic view of their financial lives, minimize behavioral slip-ups, and keep costs in check, they’ll have a bright financial future. Our job is to make that happen. On the investment side, we primarily use ETFs in our portfolios, though we are always guided by what’s best for the client.
Personally, I have a strong passion for financial education and literacy. That passion underpins everything we do at The ETF Store. I also host a podcast focused on ETF education, ETF Prime, and write about various ETF and financial topics at theETFeducator.com.
Q: What’s one thing you’ve noticed in the ETF landscape that investors should be keeping an eye on?
A: The complexity of products is growing. I have always viewed ETFs as the “Silicon Valley” of asset management. That’s both good and bad as innovation provides choices for investors. Nearly every asset class or investment strategy is now available in an ETF wrapper. On the other hand, the ease of access offered by ETFs means investors can invest in nearly every asset class or investment strategy…even ones not fully understood. An example is the United States Oil Fund (USO), which recently made a lot of headlines. Some investors see “oil” in the fund name and assume they’re getting exposure to spot oil prices. Instead, the fund rolls oil futures contracts, which can result in a much different experience.
Growing complexity may ultimately lead to regulatory changes or other initiatives that attempt to better protect and educate investors. We recently saw a coalition of ETF issuers propose a new naming convention for exchange-traded products. I wonder if we’ll see more of this and an overall greater push for ETF education. Ultimately, the onus is on individual investors to do their homework, but that doesn’t mean the ETF industry can’t do a better job to help.
Q: The chart above shows the stark underperformance of Emerging Markets funds compared to US Equity funds. How do you use charts like these to explain investing concepts in your client communications?
A: A picture is worth a thousand words. We find it extremely helpful for clients to visually observe what’s happening in their portfolios and the broader economy. A visually-appealing presentation keeps clients engaged and allows them to better crystallize ideas and concepts. In turn, that helps with investor behavior. The chart above, showing emerging markets underperformance, might emphasize that there’s no guarantee of returns, even over a 10+ year period. Or, perhaps, it could show that emerging markets might be poised to turn and that’s the rationale for owning them in a portfolio. The point is that charts tell a story, helping better frame important client conversations.
Q: How have client conversations like these changed through the recent market uncertainty? Are there any go-to charts you’re using to explain the current situation?
A: Client communication is obviously critical, whether in periods of uncertainty or times of market strength. If you’re having ongoing conversations with clients, nothing should really change when markets hit a rough patch. If you’ve done your job correctly, clients shouldn’t be surprised by how their portfolio reacts, and that can actually allow the discussion to shift towards potential opportunities rather than doom and gloom.
In terms of go-to charts, we take a longer-term view of the markets. Showing how various asset classes have performed over multiple cycles or through recessions can help offer context and perspective to clients, taking the focus off shorter-term ups and downs.
Q: How do you use ETF comparison charts to help explain your investment strategy to your clients?
A: The ETF universe is vast and expanding. There’s an ETF for nearly everything. That makes ETF due diligence an important part of our responsibilities. Simply put, ETF comparison charts help tell the story of why we own what we own.