Investors prided on their individual stock picking strategy sometimes cast their bets on lists of stocks others picked out, called ETFs. In the third quarter, the rare event that noted investors with a value slant agreed with large U.S. funds of all stripes occurred. The majority of both groups signaled that certain sector ETFs deserved their money more than the vast universe of all others.
Index investing’s big moment has been fueled by lackluster active management returns, high fees, regulation and a buoyant market. ETFs treat entire sectors like a stock but in a competition between the two leaders in each, a U.S. company trading on the S&P 500, itself an ETF of the broad market, would have won this year. NVIDIA Corp. (NVDA, Financial), the highest returning stock year to date, soared 184.8%. The best-performing ETF, PureFunds ISE Junior Silver ETF (SILJ, Financial), followed on its heels with a 169.3% gain.
The market also appears relatively expensive, with the S&P 500 as a whole trading at a trailing 12-month P/E ratio of 24.1%, near its range in 2008, leading up to the tech bubble of the early 2000s and during the Great Depression. The so-called “Trump Rally” has primed the market’s expectancy for more good times ahead, however.
Investors’ top ETF picks at the end of the third quarter made out well. The most-bought (aside from diverse market indexes) was the SPDR Gold Trust (GLD, Financial). During the third quarter, 464 large U.S. funds bought the ETF and 281 funds sold. Value gurus like it far less, with 12 holding the stock and only four buying and five selling. (One other ETF, the iShares iBoxx $ Investment Grade Corporate Bond (LQD, Financial) had more buyers, at seven, but fewer holders, at seven.)
The SPDR Gold Trust’s price rose more than 28% for the year through July, but after a post-election slump is up only 10% year to date, near parity with the S&P 500 and materials sector. The trust follows the price of gold bullion and pays no dividend. Warren Buffett (Trades, Portfolio) has named this aspect as part of his aversion to the metal.
“If [investors] become more afraid you make money,” he said. “If they become less afraid you lose money, but the gold itself doesn’t produce anything.”
The iShares MSCI Emerging Index Fund (EEM, Financial) – the most-bought ETF of large funds and second most-bought of value gurus – also proved a prescient choice. It hit its lowest point in more than six years in January and has rebounded 12.5% year to date, surpassing the S&P 500.
The emerging market index also proffers a 2.15% dividend yield, nearly matching the S&P 500’s 2.12% yield. It has a vastly cheaper P/E ratio compared to the U.S. market, at 11.5 versus 24.15.
During the third quarter, 916 large U.S. funds held shares of the emerging market ETF, with 411 buying and 347 selling. Value gurus were feeling friendlier to the cheap fund, with 13 holding shares, 10 buying and only two selling.
One of the buyers, Ray Dalio (Trades, Portfolio) of the world’s largest hedge fund, Bridgewater Associates, is watched for making emerging markets the preponderance of his portfolio, at 60% of its value, with iShares MSCI Emerging Index Fund and Vanguard FTSE Emerging Markets (VWO, Financial) each making up a third. He increased his stake in the MSCI fund by 86% in the third quarter.
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