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February 08, 2019 
The ETF-ization of Billionaire investing sucks      
The very first ETF in the U.S. was introduced in 1993. It was based on the broad-based S&P 500 index, ticker symbol SPY, brought to the market by State Street and it is still one of the biggest in terms of assets and in terms of daily trading volume. At the time, this was hailed as an innovation, which I guess it still is.
You may have heard the term "ETF-ization". It's when an economic sector or asset class becomes available to investors in the form of an Exchange Traded Fund, or ETF for short. If you ask me what is the biggest change I've seen in the stock market business since I started in 1990, I'd say it's that investors now have the ability to invest in anything and at any time. Today, you could invest in a basket of gold miners and in nearly any country-specific stock market in the world because of the growth of the ETF business. You want to invest in India? There's an ETF for that. You want to invest in Uranium? There's an ETF for that. Cannabis? Crypto? Yup, there's an ETF for those too. The ETF industry sure has come a long way since its early days of mimicking broad-based stock and bond market indexes. It's now a $4.5 Trillion industry - and growing - and gobbling up every strategy and tradable asset in its path.
To reiterate, the upside to this, as mentioned above, is that investors have near limitless opportunities to diversify and to take advantage of whatever opportunity they perceive. Plus, ETF's typically have low expense ratios and tax advantages over their actively managed mutual fund brethren. The downside is that when a group of assets are part of a basket, they often trade as one overall asset, leaving less opportunity for active managers to find values and/or discrepancies to take advantage of. Plus, when a stock gets clobbered, it drags its fellow industry members down with it because investors are mostly selling the whole basket of stocks as opposed to just that one single stock. To be sure, the above advantages and disadvantages aren't always apparent nor are they always present; I'm speaking in broad strokes.
Some of the niche and/or unique ETF's I've looked at make up a triumvirate of Billionaire-mimicking strategies. I was intrigued by this idea. Blackrock (BX, Green line), the Carlyle Group (CX, Purple line), and Icahn Enterprises LP (IEP, Light blue line ) (Yes, that Carl Icahn) are all ETF's that are based on their Billionaire managers. Yet, by nearly any metric, their historical performance is horribly disappointing. Take a look at the chart below going back five years.
(Click to enlarge)   
So, what's my point? First, Warren Buffet (BRK.B, Berkshire Hathaway, Blue/Green line) is the undisputed king of the Billionaire hill. Second, the return of those three Billionaire strategies were a combined negative return. Third, I used a large stock like Boeing (BA, Orange line) to show you that there are well known, ordinary stocks that could do very well. Fourth, the availability of over 1,700 ETF's available in the US and over 5,000 globally is probably too much choice to the detriment of investors. Fifth and final, ETF's are merely tools to help you implement a long term investment strategy that is appropriate for you based on your risk tolerance, time horizon, and financial goals.
I like to say to my clients that they should think of ETF's as building blocks, not as any single one being some amazing, catch all, check-off-all-the-boxes investment.
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. 

Mitchell O. Goldberg, AIF®, AAMS

President | Investment Professional

OSJ Manager 


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