I do the “ETF of the Week” for MarketWatch every Thursday on Chuck Jaffe’s MoneyLife Show where I highlight big movers and disappointments within the exchange traded fund market. So I was interested in what Chuck had to say about Charles Schwab’s plans to launch its first ETFs later this week.
Jaffe in a MarketWatch article published Monday notes that the ETFs will coexist with Schwab’s established lineup of fundamentally-weighted mutual funds.
The exchange traded fund industry is crafting new products based on alternative or “enhanced” indexing methodologies but that doesn’t mean investors should blindly eschew traditional market-cap ETFs. In fact, there is no reason why active strategies, market-cap weighted funds and fundamental ETFs can’t be used together.
“Say that you believe fundamental indexing is better and that, indeed, over the long haul it outperforms a traditional index by [3% or 5%],” Jeff Weniger, senior investment analyst for BMO Global Asset Management, said in the MarketWatch article. “The problem is that in any given year—on its way to that better long-term performance—it may underperform by [10%], and what are you thinking then?…You’re thinking you made a mistake and maybe you should get out, and buy the type of index that looked better that year.”
Financial advisors argue that the average ETF investor should be focusing on maintaining discipline first rather than optimizing returns. While the new fundamental index ETFs offer interesting investment strategies that help provide attractive risk-adjusted returns, traditional beta-index ETFs still have a spot in an investment portfolio. [Fundamental ETFs Try to Challenge DFA: Report]
“They’re all good approaches with their own selling points but, for the average guy, it really doesn’t matter much,” Said Samuel Lee, Morningstar ETF analyst, said in the article. “You want to capture market returns over time…No one should change indexes just because some new product is available.”