The “benefit rich” investment, Part 1

When Investnotes made its first appearance ten years ago, the goal was to provide some guidance and insight that could be used by individual investors – the little guys – to create wealth over time by investing in stocks and bonds. In those days the focus was on individual equities and mutual funds. Yet the last few of years here at Invest-Notes have seen very little in the way of specific recommendations of stocks. And the suggestion to eschew mutual funds in favor of exchange-traded funds (ETF) has been made without specific guidance.

So its time to go back to the basics. Over the next few weeks you’ll find a wide ranging discussion of why ETFs are likely the best bet for investors of all sizes over the coming decades and which ones are most appropriate for achieving your investment goals. There is a lot to share and questions are welcome, as always.

We interrupt this program…. As I am wrapping up this series of articles, The Economist this week published an unexpected endorsement of the ideas you are about to enjoy. Serendipity indeed:


Much to my surprise, ETFs have been around over 25 years. That they have survived through some of the toughest markets in history – and not just the market mayhem of 2008-2009, but also the dot-com bust and flash crash – is evidence that these are robust financial products. Almost unbelievably, ETFs came about based on an idea floated in 1988 by the U.S. Securities and Exchange Commission (SEC) in their report on the reasons for the October 1987 crash, with the first ETF actually appearing in 1990 on the Toronto Stock Exchange.

Today, the Standard & Poor’s Depository Receipts known by its ticker of SPY gets credit as the first ETF, mostly because of the marketing splash created by its launch in 1993. SPY holds the same stocks, in the same quantity, as the S&P 500 index, which is quoted daily and considered the best proxy for how stocks are trading. Not initially much of a success, today SPY is the most traded security in the world with around $175-billion in assets.

The total holdings of all 1800 ETFs currently available is about 5% of the total float of equity markets worldwide (there are another 1300 ETFs pending approval from the SEC). And, less than 2% of all bond and commodity market assets are traded through ETFs. Yet at the end of 2015 there was almost $16-trillion invested in U.S. mutual funds while ETF ownership worldwide is just $3-trillion.

That ETFs come in so many colors and flavors means more, not less, due diligence is needed in making selections for your portfolio. But due to the many benefits offered by ETFs that are not available from individual stocks, bonds or mutual funds, for most individual investors they are a better bet for savings and retirement accounts. Advantages include ease of asset allocation (many are laser-focused), liquidity (easy to buy and sell) and tax efficiency.

The wealth of Americans reached a record of $88.1 trillion in the first quarter of 2016. What are you doing with your share?

In preparing this series on ETFs, many books and a lot of articles from Bloomberg and Morningstar were reviewed. If you’d rather not just believe me, check out these:

Eric Balchunas – Bloomberg analyst specializing in ETFs, he has been a thought leader in the field for over a decade. His book, The Institutional ETF Toolbox, is a terrific resource. While focused on major players, individual investors can glean a lot of insights for using ETFs.

Richard Ferri – Written in 2007, The ETF Book, was one of the first books to focus on ETFs and the value they can provide as an anchor to an investment portfolio. The founder of an investment advisory firm, this is a guy who uses ETFs in portfolios and gets paid to do so successfully.

David Abner – The ETF Handbook, even more so than Toolbox, is intended for professional traders and so much individual investors. Currently a Director at Wisdom Tree (one of the major innovators in ETF products) he has a front row seat to the rapidly evolving world of ETF products.

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