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Look Under the Hood

Steve Abramowitz

I’M NOT A MARKET addict. How can I be so sure? Because, on many occasions, I’ve been able to stop myself from trading excessively. Still, in July, the stars aligned to make me susceptible to another relapse.

A reluctant traveler at best, I was persuaded to accompany my wife Alberta to a 14-day writers’ conference in Upstate New York. I’m a confirmed introvert, so I groove on alone time. But 10 hours every day—while Alberta attended the conference—proved to be a challenge.

Predictably, the extended ennui triggered my old trading symptoms. Why not embellish my long-term exchange-traded fund (ETF) portfolio with 5% positions in both a racy artificial intelligence (AI) fund and a bet on the expected explosion in the world’s elderly population? I temporarily surrendered to impulse. But fortuitously, the results of my research argued for abstinence.

Marketing is merely slick advertising. At one time, cars driven past their prime were called used. But as auto dealerships’ flapping red banners loudly proclaim, those smooth-talking salesmen are now pushing “pre-owned” cars.

Stock investors are no less susceptible to such flimflam. In fact, they may be more vulnerable, since most car shoppers enter the fray a tad suspicious. By contrast, the person considering a stock purchase may assume she’s protected by government regulation and the financial community’s cleverly crafted image as a trustworthy steward of her money.

Latecomers to the dot-com craze 25 years ago were fleeced by non-tech startups branded with high-tech names. More recently, the Long Island Iced Tea Corp. reinvented itself as the Long Blockchain Corp. in 2017, despite having no blockchain activities. Its stock soared more than 300% following the announcement, only to crater soon after. The microcap stock was delisted in 2021 for “taking advantage of investor interest in blockchain technology.”

 Years of stepped-up federal and industry oversight haven’t prevented such chicanery from extending to mutual funds and ETFs. A recent case in point: the proliferation of ETFs offering participation in the robotic and AI frenzy. But how much exposure to the theme do such funds really provide? Take the Global X Artificial Intelligence & Technology ETF (symbol: AIQ). All of its top 10 holdings—accounting for 32% of the fund’s assets—qualify as mega-cap stocks, including Apple, Intel and Meta Platforms (formerly Facebook).

You might recall Carolyn Lynch’s discovery of the ingeniously designed display of L’eggs hosiery. Her husband, celebrated Fidelity Magellan Fund manager Peter Lynch, relates in his 1989 bestselling book One Up on Wall Street how Hanes’s small company size influenced his decision to invest in the manufacturer. Profits from what became one of the most successful consumer product launches of the 1970s would significantly impact the company’s bottom line. By contrast, just how much can AI contribute to the earnings of today’s technology behemoths?

On a hunch, I pulled the relevant information for Vanguard Group’s Information Technology ETF (VGT). Many of the largest positions in the Global X ETF figured prominently in the Vanguard ETF with its broader tech mandate. But despite the spectacular move in AI stocks in the first half of this year, the average annual return of the AI fund over the three years through Aug. 31 was only 6.3%. The corresponding figure for Vanguard Technology was 11.5%.

On top of that, the tiny 0.1% annual expense ratio at Vanguard makes Global X’s 0.68% look prohibitive. I already have enough technology through my broad-based ETFs. The upshot: I took a pass on the Global X fund.

Undaunted by my AI frustration, I searched for ETFs investing in companies that could benefit from the anticipated surge in the elderly population. I could find only one fund easily accessible to U.S. citizens, the Global X Aging Population ETF (AGNG). Hey, I’m really not trying to single out the creative Global X management team for its sorry practices, which are widespread among other fund families. Its offerings are among the most forward-looking in the ETF sphere. But sometimes, the rush to attract investors can invite excess.

The Global X ETF has been promoted as capturing the investment opportunities presented by the world’s aging population. But it’s not innovative at all. It’s merely a stealth health care fund, and a poor substitute at that. Why do I think so? All of the fund’s top 10 holdings are related to medicine. In fact, a staggering 93% of the fund’s portfolio is invested in companies engaged in some aspect of health care. Likewise, its 0.5% annual expense ratio compares unfavorably to the 0.1% cost of the Vanguard Health Care ETF (VHT).

According to Morningstar, the three-year average annual results for Global X Aging and Vanguard Health Care were 2.6% and 7%, respectively. In addition, the Vanguard fund’s maximum drawdown in the last three years was much lower, sealing the deal. I don’t need another health fund masquerading as something more exotic.

“What’s in a name?” Not always what the marketing arms of the country’s leading fund management companies would have us believe. Long-term investors with an itch to trade around the edges of their portfolio, and short-termers craving the latest market darlings, would do well to look under the hood.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.

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