Slicing and dicing up indexes are what fund companies do best these days because most can’t compete with the low-cost leader in the industry. A new story is told, almost daily, about how you might make money or avoid losing money with some new fund – then you get charged an arm and leg for that narrative. And that is how fund companies try to create demand out of thin air.
The new yarn being spun is the need to avoid one specific sector in the market. To tell the tale, the fund company uses hindsight to weave its story.
The abridged version goes like this: If you think a sector – like poorly performing energy (the hindsight) – will underperform the market, why own it? Or maybe you’re already exposed to a sector and don’t want to own more.
Admittedly, the latter is a solid point – for example, companies offer employee share purchase plans – that people must plan around (somehow I doubt these funds are the best solution).
But to solve this dire problem they created ten funds, each one excludes one sector of the market, right?
Or not.
Only four funds were created because…and I’m just guessing here…easier tale to sell…the other sectors don’t matter…I’m out of guesses.
Apparently, the fund company only believes energy (SPXE), health care (SPXV), financials (SPXN), and technology (SPXT) are worth avoiding…or worth selling.
No surprise, if you want to build funds around a great story, these four are probably the best sectors to do it. Pick the most recent best-performing sector (health care), the worst performing sector (energy), and the two sectors tied to the last two crashes (financials and technology), and then charge twice as much as the individual sector funds to do it.
Why does it work? Because fear and the recency effect drive too many investors decisions and fund companies know it.
- Holy volatility! Can’t handle another 2010, 2011, or 2012? These low-volatility funds might calm things down.
- Terrible energy sector performance! What if it continues? Think of how much more money you’d have without it.
- Financial crisis! What if it happens again? Just avoid the banks.
Some section of the market will outperform, one will underperform, and new funds will forever be created to chase the past. Don’t be that person who always invests in the rearview mirror.
Last Call
- Market Timing is Back in the Hunt for Investors – Institutional Investor
- Valuation Metrics In Perspective – L. Swedroe
- Reeling In Small-Cap Alpha – Research Affiliates
- The Power of Common Sense – M. Housel
- Let Go of Irrational Fears – C. Richards
- Short-Term Thinking – NY Times
- The Essentials of Innovation (Podcast) – McKinsey
- Runaway Stories and Fairy Tale Endings: The Cautionary Tale of Theranos – Musings on Markets
- The Discovery of Statistical Regression – Priceonomics
