Industry insider says simply following popular ETFs is a risky business
ETF fees are only a small part of the process, according to a veteran portfolio manager, who believes steering clear of the herd mentality is more important for investors.
Ken MacNeal, director, wealth management at GMP Richardson Limited, said the debate over fees and the “race to the bottom” naturally depends on whether you’re in the active or passive market.
For active, he said investors are paying only on a short-term basis so are looking for performance net of fees, which he beleieves are “incidental”.
Rather than obsessing over MER costs, Calgary-based MacNeal said there are other risks that demand attention.
“I think it’s a danger to look at performance if you are only looking at what has happened in the past,” he said. “The past is not necessarily a good indicator of the future and there tends to be a herding bias behaviourally of people buying the most successful, popular things and that can come back to bite them in the future.”
He said this is particularly true of ETFs that have been around for a long time, could well be overvalued and where there is more possibility of a correction. MacNeal stressed the most important thing is to assess companies at an executive level and cites his own book, Momentum Investing in the Internet Age.
He said: “It talks about making sure that the leadership of these outperforming groups stays in place. The trick is to stay with the leaders. When the leaders start falling then you basically get out of it.”
He also sounded a warning about the emergence of 0% trading platforms. Already in effect in the States, Canada’s Wealthsimple is poised to launch its own app soon and MacNeal said this could have an effect on the markets, causing more volatility.
He said: “That will likely encourage people to be trading more and that could lead to more volatile movements in the markets as it spills over into the individual securities.
“Apple I believe is now in around 200 ETFs, so you have an incredible concentration of stocks within multiple ETFs. Let’s say there is a major news event and people decide to get out of that ETF, it could have a negative impact in the market and trade volatility.”