Reasons For Not Investing in ETFs


8/2/17

In the investing advice world, one often reads something like "just invest in an ETF that replicates the S&P 500, and you'll do OK." This view, I believe, is very flawed.

First, please show me just one person on the Forbes most wealthy list who got there from "buying and holding and adding to an S&P tracking ETF". I don't believe that will ever happen, and I think there is a reason for that. You will find a lot of average investors with average results and a lot of evidence that ETFs are popular. Those findings should make you pause and think.

Keep in mind that when you buy shares of an S&P tracking ETF you're not buying the actual shares of the companies comprising the S&P 500, you're buying units of a single stock (ETF). It is possible that something happens to, say, SPY itself, since it is, after all, just a single stock ran by a company. I don't think it very probable, but technically it is possible. Note that, like single stocks, many ETFs have also failed in the past for various reasons.

I actually happen to be an index fan (DIA, because of monthly dividends and it correlates well with the S&P too) but I think relying on them exclusively is what I call "pseudo-diversification" or "diversifiction" or "diworseification". In my opinion, it is almost always better to buy individual stocks and create your own index (especially if you do not get charged commissions) if you want to go that route. Heck, there are several stocks that are already index-like as is (BRK and GE come to mind).

Adopting this strategy will probably enable you to take more advantage of dividend growth, cutting losses earlier, control dividend payment frequency, and actually own actual shares of companies you care about (not shares of an ETF) and want to have some voting power with.

Of course, most investors not completely indoctrinated in investing in index replicating ETFs eventually ask themselves "I wonder which of the several S&P 500 ETFs performs best?" and then notice that there are other indexes and weightings that perform even better. From there I find they are quick to notice simply that many individual stocks perform better.

Thanks for reading!


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