Good and bad advice to your financial advisor

2022-01-27

Both points that are made today in the ETF Insider report at FinancialAdvisorIQ.com have been discussed by me repeatedly here in the blog and coincidentally in my upcoming book “120 Lessons in Capital Markets”.

Welcome to this week’s ETF Insider. We’re looking at two tools in advisors’ ETF portfolio construction kit and how to wield them in tumultuous markets like these.

Some big sector ETFs are going to get a makeover next year, as S&P and MSCI shift where big companies like Visa and Target fit within their industry classification system. This upcoming change is a good reminder to advisors to look under the hood of such products to ensure that what you expect a given sector fund to include matches what’s inside.

Currency-hedged strategies, meanwhile, are shining as investors wait for Federal Reserve interest rate hikes and watch the soaring U.S. dollar. The problem is that some advisors and clients were burned by the products years ago and are missing out, now that the funds are showcasing their benefits. We’ll also look at BlackRock’s plans for a blockchain ETF amid turmoil in the crypto markets.

The first point is about the Global Industry Classification System (GICS), which is my trading compass.

In Lesson 5 (“Traders Need Structure”) of the draft that I already submitted to the book publisher, I wrote as follows:

Contrary to common perception and the claims of some academics, thankfully the capital market is well organized. There are well-thought-out market sector and industry classification systems that enable traders to grasp market dynamics. Without such systems, the capital market would be even more chaotic than it appears to the average person.

In this discussion, you must appreciate that classification systems often err in classifying companies, at least in the eyes of the beholder. For some of you, Apple is a technology company whereas others see it as a Media company, and others as a Music company and others as a Retailer. There is no doubt that Apple has widely varied business segments and maybe should just be classified, like Warren Buffett’s Berkshire Hathaway, as a Conglomerate.

But here’s the thing: without classification systems, our lives would be more difficult than necessary. Take for example the supermarket. There are sections and aisles to guide shoppers to an efficient shopping experience. Without structure and say fruits and vegetables, dairy, canned goods, meats, seafoods, breads, health and beauty, and beer and wine, were interspersed throughout the store, we would be quite unhappy. Sometimes, the stores do put certain products in unaccustomed sections, which is why we tend to frequent the stores we know. So, in the GICS system, if Apple (AAPL) is classified in one place only, then at least we know where to look for it even if the place is not to our liking.

Some of you will recall my expose of a named Marijuana ETF where the constituents were almost all tobacco companies. The name was strictly a marketing hook, to hell with reality. As I write this, with CNBC in the background I see a TV commercial that exclaims “Ground Beef Free for Life”. How far down this marketing rabbit hole does the industry want to get before class-action lawyers start suing for fraud?

As FinancialAdvisorIQ points out, “This upcoming change is a good reminder to advisors to look under the (ETF) hood”.

And speaking about ETFs, you know I have a chapter on them. I actually wrote eight chapters that included info on ETFs, but only in one of them do I tell the reader exactly what I think, which is to say don’t trade them because they are tools of Wall Street fraud artists.

That brings me to the second point made in the FinancialAdvisorIQ article, which is the introduction of “BlackRock’s plans for a blockchain ETF”.

Well, you can already guess what I think of that, so I’ll get back to my breakfast.


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