Have we reached the high water mark for indexing as a way to invest? Have we finally recognized the lunacy of "single-stock risk" as a rubric for Wall Street to take your money?
As I look at the shattered remnants of last week's selloff and the ensuing chaos of this week, I am beginning to wonder that the most popular method of investing I have ever seen -- give it to someone else in some mechanical way and fuggedhaboutit -- may have reached its apex. That would make sense, given that more than half of all funds are now indexed and something that popular is rarely that right when it comes to your money.
Remember, the premise is that no one can beat the market, so if you can't beat it then join it. I have been a believer because I know the dirty little secret about S&P index funds at least, each year they take out the winners, those that have gotten takeover bids and are sold at a premium to where they were, and they take out the losers, those that got too small usually because of genuine business risk -- meaning that the companies removed could be on their last legs.
Then they replace the losers and those that got bought with the best up and comers on their considerable S&P 400 bench. The farm team can't be beat.
No wonder it often has to beat an active manager. That manager is going to be overweight the stocks that get bids and underweight the stocks that ultimately get dropped and anticipate the next man up.
A down market validates any non-indexer if that non-indexer has cash. But that's never really talked about.
So, I am not going to denigrate the actual S&P bedrock. I have it. You have it.
I am, however, going to have to insist that, other than the SPDR Gold Shares (GLD) , the massive movement toward sector ETFs is being revealed more and more as something that is just simply not prudent. The overall S&P 500 concept works because it is actually an actively managed, take over and failure adjusted fund. But these slivers? They are fee generators and may be no more.
Take yesterday. I spent a considerable amount of time with Mike Wirth, the incredibly good CEO of Chevron (CVX) . There simply isn't a ratio that Mike doesn't have all the others beat on: cash flow, growth, dividend, buyback, even ESG considerations like flaring.
In fact, I would stack his stats against any company in the S&P 500, not just the oils.
But it doesn't matter. Chevron's in the oil ETF and the preponderance of oil stock trading is in the ETFs. In reality, the best thing you could be doing here is going long Chevron and betting against the ETF. That's an active manager's method. I would use the ETF against itself and its adopters and execute that strategy.
Oil's not alone. The drug stock ETFs have similarly homogenized the un-homogenizable. We have very good drug stocks and good companies and some very bad ones. Same with biotech. They are too numerous to mention, but I highlight the winners pretty much every night. Why do you need to own the losers, the ones that spend little on R&D and have no real pipeline? Just because you don't have time? What a terrible reason to waste your money.
Then there's the issue of the obvious. The single0stock risk of FAANG or WATCH, my acronym's for Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) ; or Walmart (WMT) , Amazon, Target (TGT) , Costco (COST) and Home Depot (HD) .
These are the best companies in their industries. They have the best balance sheets. They have the best growth. They have the most unassailable positions. The fee-hungry industry, which is constantly running out of ways to grow, would have you believe that each of these is more dangerous than the last because they are individual stocks and if you mix them up with Twitter (TWTR) and Snap (SNAP) or Hewlett Packard Enterprise (HPE) and IBM (IBM) or Intel (INTC) or Kohls (KSS) and Big Lots (BIG) and Nordstrom (JWN) , you will somehow soften the blow. That's not softening the blow. That's just faux diversity diluting the good. It's just Gresham's law by indexing and it smacks more of legerdemain than rigor.
I know I am early. But anyone who does not see this peak on the horizon believes that their view will inherit the earth. My suggestion: Sure, but only if you never age and, to me, you are already past that point in time.
