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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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That is sooo funny… I was thinking about buying Global X ETF’s after listening to Ric Edelman touting them many times…. I just changed my mind!! Thank you!
Maybe I’m missing a gene, but if I had two weeks to kill in upstate New York (or anywhere else for that matter), thinking about the latest stock fad is the last thing I would do. What on earth is wrong with a total market index fund? Or an S&P fund plus an extended market fund if you want to get fancy?
Some suggestions for next time (although I would add Albany).
Hi My Time,
Sure sounds like you have been fortunate to find an investment plan and philosophy of life that works well and is fulfilling for you—and that’s great! But, yes, my genes and family experiences have pointed me in a different direction. I am partly retired and enjoying contemplative pursuits like seeing a few patients, tinkering with my investments, reading and trying to deepen my relationships with my wife and son. Such a sedentary and compartmentalized life may not work as well for you, but I am a kind of merry utility infielder for now.
There is absolutely nothing wrong with your investment plan—in fact, it’s wise and laudable. Had I not been a latecomer to the program, I would be more financially blessed than I am now.
Yes, I still like to splash in the shallow end of the pool—I enjoy the challenge. Even Bill Sharpe, one of the pioneers of the efficient market hypothesis that underpins index investing, confesses to dabbling in individual stocks. He thinks it’s fun, too.
For an ETF focused on AI and robotics, you may wish to take a look at the Robotics and Artificial Intelligence (BOTZ) ETF. I have a small holding in it in my taxable brokerage account. While NVidia is its largest holding at 14%, the next five largest holdings include firms such as Intuitive Surgical and Keyence — e.g. non megacap stocks. Expense ratio is .69%. Perhaps worth a look: Robotics & Artificial Intelligence ETF (BOTZ) (globalxetfs.com)
Yes, BOTZ has emerged as the most popular (highest volume) ETF and is probably your best bet (pun intended) if you want to go in that direction. It seems like that first wave of hoopla surrounding AI may be over so any tempted readers may want to wait for signs of a resurgence.
I have a book by Dr. Laurence J. Peter, and one of his quotes is “Marketing is the rattling of a stick in a bucket of swill.” Not sure this is verbatim, but very close.
The professor of the Marketing class I took many years ago said that “Marketing is the the steak sizzle.”
Hi Jeff
I’ve got to remember that line!
A prominent investment advisory service and a large insurance company are currently parading misleading information across our TV screens. The advisory group purrs it “doesn’t make money unless you do.” Isn’t that called at least a 1% fee on assets under management—the most lucrative pay structure in the industry? How about only signing you up for “the insurance you need?” Isn’t that something primarily determined by you and your agent? Thanks for writing in again.
Steve, great illustration that no market is completely safe to the unwary buyer. Money attracts all kinds.
Hi Edmund,
That’s undoubtedly why so many seem to congregate in the investment world. The latest hot “product” is the actively managed ETF. Astonishingly, a recent marketing onslaught has been successful at luring the unwary into costly “actively managed” ETFs. Anything to offset the loss of profits from the rush to exit expensive actively managed mutual funds. Nothing like charging more for an ETF when it’s well- known that high fees and active management don’t enhance returns and may even detract from them. Thanks for starting off the conversation.
Actually research has shown that there is an inverse relationship between expense ratio and performance.
Again as John Bogle was fond of saying, “YOU get what you don’t pay for”!
You’re so right—and according to Morningstar, low cost is one of the most reliable and powerful predictors of positive performance.