Picking the Right Club for the Next Shot in ETFs

Recently I heard an interview with retired professional golfer Jack Nicklaus. He talked about how technological advances in golf equipment has made a positive difference for today’s players.

Unfortunately, new golf equipment has done little to advance my golf game.

After purchasing a new driver, my slice off the tee remained. Clearly, better equipment and tools in the hands of golf experts has the potential to add distance and accuracy. This same equipment in the hands of an occasional golfer makes less difference.

Advances in investment tools in the form of ETFs is a “game changer,” with the potential to add distance and accuracy to investment returns.

However, just as a golfer with poor technique sees little benefit from a new driver, an investor that does not know how to properly use a specific ETF may not see “game changing” results. Today’s investor has far more than 14 clubs in his golf bag. He or she has the choice of more than a thousand targeted, transparent, and traded ETFs.

I have had the occasion in recent years to attend two PGA tour events. I enjoyed watching the tour professionals on the driving range and on the putting green hours before teeing off. The discipline of the practice routines was memorizing.

I remember watching Rory McIlroy on the putting green as he followed an intricate process of hitting putts from a variety of angles and distances. He set tees at a variety of distances, and he had to successfully sink puts from all areas before moving on. Later that day, we watched Rory from behind the green on the first hole. It was no surprise when Rory sunk a similar length putt that I had watched him consistently practice just a few hours before.

One of the main takeaways for me from watching a day of professional golf up close was the ability of the pro golfers to adapt to a variety of distances, conditions, and difficult lies. As they approached each shot, they seemed to know which club to select and where to aim.

As ETF strategists, we follow the same practice and care in ETF selection and in the management of ETF portfolios. If the investor is not careful about selecting the appropriate ETF “club,” it is the equivalent of playing an entire round with only a driver, or trying to putt with a nine iron. Both are essential clubs, but they should be used in different circumstances.

I loved watching the golfers find creative ways out of difficult lies. There was rarely a sign of outward dismay or panic. Instead, they seemed to have prepared for this moment by deciding ahead of time how they would respond. They already had a framework for making decisions. Unfortunately, good decisions and technique are not rewarded on every shot. Legendary golfer Bobby Jones said, “Golf is the closest game to the game we call life. You get bad breaks from good shots; you get good breaks from bad shots – but you have to play the ball where it lies.”

It is often most dangerous for long-term wealth creation when the market temporarily rewards poor decision-making and bad investment behavior.  On the other hand, sound investment strategies may be abandoned when swallowed by noisy markets or when a particular strategy or asset class is out of season.  However, we would argue that good technique, top equipment, physical strength, and mental toughness will lead to better golf over a round, a season, and a career.

The golf “process” is fundamental to success. In my experience as a very average golfer, I will hit a great shot a few times during the course of a round. Unfortunately, I am not aware enough of my golf process, technique, or form to know what I did so that I can replicate the good shot!  I am just as likely to top my next shot, slice it, or hit it in the lake.