Investors in passive ETFs risk getting burnt by the market volatility, according to an industry insider.
The jitters returned to the indexes yesterday as US stocks fell to a two-month low. The Dow Jones Industrial Average closed down more than 1,000 points, while the S&P 500 was down 100 (3.75%), wiping out its gains for year.
Celebrating our industry successes in the wealth management industry
It comes at the end of a week in which fear has gripped equity markets over concerns rising inflation and interest rates will drag down the economy.
David Little, of Little Wealth Management Group of HollisWealth, believes ETFs will continue to thrive because people are fixated on only one aspect of the product – the price.
But he said investors in passive ETFs are at the mercy of a major market correction unless they have a strategy in place or have it as part of a diversified portfolio.
Little also said publicity around the likes of the Questrade commercials misleads people by promising get-rich-quick results. He believes an advisor such as himself would never be able to get an ad like that through compliance and IIROC.
This week’s wild ride on the markets should make investors realise that ETFs need to be monitored, he said.
“I profess to all of my clients, it’s one aspect of where we put our money, but there has got to be some fundamentals there and it has to be looked at.
“So yeah, we buy stocks, we buy mutual funds, we buy ETFs, we buy individual bonds, we buy pension pools … we buy everything. Don’t put everything in one thing because of what the price is.
“You can say I saved 1% [in price] and I’ll say, well you just lost 100% on the market and our portfolio only lost 25% of the market, so I think if people are only in ETFs and they are in passive, then yes, if we do get a correction, they are going to get a wake-up call.
“Even the people who manage ETFs are saying too much money is flowing in there. Even the government is starting to look at it, and I think that’s a really big problem.”
Asset allocation is key for Little, who sat back and watched the stock market volatility unfold this week. The correction has not been big enough yet to entice him to go back in and buy more equity, but the shift is something he had been preparing for.
He said: “We’ve been pretty well managed on asset allocation for about a year and half and it was a bit frustrating for some clients, who were asking, why am I in this when the market is going up so much? But I said there’s going to be a day when you’ll be happy I did that and that came to roost without question.
“I’m still looking at where I want to be buying if I’m putting more money into equities and it’s just not there yet. If I was going to be doing anything right now, I’d probably be buying 25% or 33% of what I wanted to buy over time So I wouldn’t just hedgehog in there and buy a whole load of stocks, I’d be dollar-cost-averaging; just taking a little nibble here and there.”
Little said strategy is overlooked by a lot of retail investors, something the rise of weed stocks has highlighted.
He said: “If you were stupid enough to buy at $38 and $40, then your stupidity should have stopped when it was at $22 and you didn’t buy any. Now on one stock, on weed alone, you’re back up to $27 again.
“What happens is people panic and they go away and they don’t come back because they don’t have a strategy to go into dollar-cost-averaging.”
How stocks slump was wake-up call for investors
'Understand the fundamentals of pot and crypto'
More market talk: