Invest in the world’s best ETFs & index funds (updated 2017) vs stocks investing

(Last Updated On: 06/04/2017)

This is one page summary of the best ETFs* available to you to invest in the US. If you are not residing in US, then you can still access to these ETFs through many international online brokerages like Scottrade, Interactive Brokers, Fidelity, Capital One Investing and TDAmeritrade.

I would personally recommend TDAmeritrade because I have personally used it.  I love the UI of TD Ameritrade. TD has the most commission-free ETFs, and if you’re moving a significant amount of money, you will get a sign-up bonus when you fund your account.

I define the best ETF by filtering out all non-commission free ETFs. This way, you reap the benefit of having 100% of your money being invested, either lump sum or dollar cost averaging. Then using data from TDAmeritrade, I categorize each ETF based on its asset class, and compare its standardized return since inception up to 31 Dec 2016.

Standardized Returns assume reinvestment of dividends and capital gains. It depicts annualized returns without adjusting for the effects of taxation, but are adjusted to reflect sales charges and ongoing fund expenses.

ETFETF CategoryStandardized Return
(as of 31 Dec 2016) since inception
ETF BenchmarkInception YearManagement Fee
iShares China Large-CapChina region7.85%FTSE China 50 Index20040.74%
SPDR® S&P China ETFChina region+5.23%S&P China BMI Index20070.59%
PowerShares DB Commodity Index Tracking FundCommodity Broad Basket-3.34%n/a20060.85%
PowerShares DB Oil FundCommodity Energy-8.39%n/a20070.75%
iShares Intermediate Credit Bond ETFCorporate Bond+4.45%Barclays U.S. Intermediate Credit Bond Index20070.20%
iShares iBoxx $ Investment Grade Corporate Bond ETFCorporate Bond+5.56% Markit iBoxx® USD Liquid Investment Grade Index 20020.15%
iShares MSCI BRIC ETFDiversified Emerging Mkts-4.40% MSCI BRIC Index20070.72%
SPDR® S&P Emerging Markets Small Cap ETFDiversified Emerging Mkts-0.68% S&P Emerging Markets Under USD2 Billion Index20080.65%
Vanguard FTSE Emerging Markets Index Fund ETF SharesDiversified Emerging Mkts+5.61% FTSE Emerging Markets All Cap China A Inclusion Index20050.07%
PowerShares Emerging Markets Sovereign Debt PortfolioEmerging Markets Bond+6.68%DBIQ Emerging Market USD Liquid Balanced Index20070.50%
SPDR® EURO STOXX 50 ETFEurope Stocks+5.50% EURO STOXX 50® Index20020.29%
Vanguard FTSE Europe ETFEurope Stocks+3.44% FTSE Developed Europe All Cap Index20050.08%
Vanguard FTSE All-World ex-US Index Fund ETF SharesForeign Large Blend+1.24% FTSE All-World ex US Index20070.08%
Vanguard FTSE Developed Markets Index Fund ETF SharesForeign Large Blend-0.29% FTSE Developed All Cap ex US Index20070.06%
iShares MSCI EAFE Growth ETFForeign Large Growth+3.95% MSCI EAFE Growth Index20050.40%
iShares MSCI EAFE Value ETFForeign Large Value+2.85% MSCI EAFE Value Index20050.40%
iShares MSCI EAFE Small-Cap ETFForeign Small/Mid Blend+2.40% MSCI EAFE Small Cap Index20070.40%
Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF SharesForeign Small/Mid Blend+10.87% TSE Global Small Cap ex US Index20090.08%
SPDR® Dow Jones International Real Estate ETFGlobal Real Estate-0.10% Dow Jones Global ex-U.S. Select Real Estate Securities Index20060.59%
SPDR® Dow Jones Global Real Estate ETFGlobal Real Estate+3.47% Dow Jones Global Select Real Estate Securities Index20080.50%
SPDR® Bloomberg Barclays High Yield Bond ETFHigh Yield Bond
+5.44%Bloomberg Barclays High Yield Very Liquid Index20070.40%
WisdomTree India Earnings FundIndia Equity-1.61% WisdomTree India Earnings Index20080.83%
PIMCO 1-5 Year U.S. TIPS Index Exchange-Traded FundInflation-Protected Bond+1.76% BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury IndexSM20090.20%
iShares TIPS Bond ETFInflation-Protected Bond+4.13% Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L)20030.20%
iShares 3-7 Year Treasury Bond ETFIntermediate Government+4.07% ICE U.S. Treasury 3-7 Year Bond Index20070.15%
Vanguard Intermediate-Term Government Bond Index Fund ETF SharesIntermediate Government2.97%Bloomberg Barclays U.S. 3-10 Year Government Float Adjusted Index. 20090.06%
iShares Core US Aggregate BondIntermediate-Term Bond+4.06%Bloomberg Barclays U.S. Aggregate Bond Index20030.05%
Vanguard Interm-Term Bond ETFIntermediate-Term Bond+5.34% Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index20070.08%
Vanguard Total Bond Market ETFIntermediate-Term Bond+4.24% Bloomberg Barclays U.S. Aggregate Float Adjusted Index20070.04%
iShares Interm Government/Credit BdIntermediate-Term Bond+3.67%Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index20070.20%
iShares MBSIntermediate-Term Bond+3.81% Bloomberg Barclays U.S. MBS Index20070.25%
Vanguard Mortgage-Backed Secs ETFIntermediate-Term Bond+2.84%Bloomberg Barclays U.S. MBS Float Adjusted Index20090.05%
iShares MSCI Japan ETFJapan Stock+0.08% MSCI Japan Index19960.48%
iShares Core S&P 500 ETFLarge Blend+4.60%S&P 50020000.04%
iShares Russell 1000 ETFLarge Blend+4.79%
Russell 1000® Index20000.15%
iShares Russell 3000 ETFLarge Blend+5.18%Russell 3000® Index20000.20%
iShares S&P 100 ETFLarge Blend+3.90%
S&P 10020000.20%
Vanguard Dividend Appreciation Index Fund ETF SharesLarge Blend+7.35%NASDAQ US Dividend Achievers Select Index20060.08%
Vanguard Total Stock Market Index Fund ETF SharesLarge Blend+6.54%CRSP US Total Market Index20010.04%
iShares Russell 1000 Growth ETFLarge Growth+2.89%Russell 1000® Growth Index20000.20%
Vanguard Mega Cap Growth Index Fund ETF SharesLarge Growth+7.73%CRSP US Mega Cap Growth Index20070.06%
Vanguard Growth Index Fund ETF SharesLarge Growth+7.60% CRSP US Large Cap Growth Index20040.07%
iShares S&P 500 Value ETFLarge Value+5.48%S&P 500 Value IndexTM20000.18%
iShares Russell 1000 Value ETFLarge Value+6.61% Russell 1000® Value Index20000.20%
Vanguard Value Index Fund ETF SharesLarge Value+7.71% CRSP US Large Cap Value Index20040.07%
Vanguard High Dividend Yield Index Fund ETF SharesLarge Value+7.43%FTSE High Dividend Yield Index20060.07%
iShares MSCI Brazil Capped ETFLatin America Stock+6.08%MSCI Brazil 25/50 Index20000.63%
iShares Latin America 40 ETFLatin America Stock+10.63% S&P Latin America 40TM20010.49%
Vanguard Extended Duration Treasury Index Fund ETF SharesLong Government+8.13% Bloomberg Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index20070.06%
iShares 20+ Year Treasury Bond ETFLong Government+6.58% ICE U.S. Treasury 20+ Year Bond Index20020.15%
Vanguard Long-Term Government Bond Index Fund ETF SharesLong Government+6.10%Bloomberg Barclays U.S. Long Government Float Adjusted Index20090.05%
Vanguard Long-Term Bond Index Fund ETF SharesNYSE Long-Term Bond+6.94%Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index20070.08%
iShares Core S&P Mid-Cap ETFMid-Cap Blend+9.34%S&P MidCap 40020000.07%
Vanguard Mid-Cap Index Fund ETF SharesMid-Cap Blend+9.21% CRSP US Mid Cap Index20040.06%
Vanguard Extended Market Index Fund ETF SharesMid-Cap Blend+9.31%
S&P Completion Index20010.07%
iShares Russell Mid-Cap Growth ETFMid-Cap Growth+7.37%
Russell Midcap Growth Index20010.25%
Vanguard Mid-Cap Growth Index Fund ETF SharesMid-Cap Growth+7.86%CRSP US Mid Cap Growth Index20060.06%
iShares Russell Mid-Cap Value ETFMid-Cap Value+9.74% Russell Midcap Value Index20010.25%
Vanguard Mid-Cap Value Index Fund ETF SharesMid-Cap Value+8.56%CRSP US Mid Cap Value Index20060.06%
iShares MSCI Australia ETFRegional+7.57%MSCI Australia Index19960.48%
iShares MSCI Canada ETFRegional+8.02% MSCI Canada Index19960.48%
iShares MSCI Germany ETFRegional+5.77%MSCI Germany Index19960.48%
iShares MSCI Italy Capped ETFRegional+3.28%MSCI Italy 25/50 Index19960.48%
iShares MSCI Spain Capped ETFRegional+7.15%MSCI Spain 25/50 Index19960.48%
iShares MSCI France ETFRegional+5.91% MSCI France Index19960.48%
iShares MSCI United Kingdom ETFRegional+4.86%MSCI United Kingdom Index19960.48%
SPDR® S&P Emerging Europe ETFRegional-4.44% S&P European Emerging Capped BMI Index20070.48%
VanEck Vectors Russia ETFRegional-4.08%MVISä Russia Index20070.48%
iShares MSCI All Country Asia ex Japan ETFPacific/Asia ex-Japan Stk+2.97%MSCI AC Asia ex Japan Index20080.71%
SPDR® Dow Jones REIT ETFReal Estate+10.85%Dow Jones U.S. Select REIT Index20010.25%
Vanguard REIT Index Fund ETF SharesReal Estate+9.22% MSCI US REIT Index20040.11%
iShares 1-3 Year Treasury Bond ETFShort Government+2.09% ICE U.S. Treasury 1-3 Year Bond Index20020.15%
Vanguard Short-Term Bond Index Fund ETF SharesShort-Term Bond+2.89%Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index20070.08%
iShares 1-3 Year Credit Bond ETFShort-Term Bond+2.81% Bloomberg Barclays U.S. 1-3 Year Credit Bond Index20070.20%
Vanguard Short-Term Corporate Bond Index Fund ETF SharesShort-Term Bond+2.98% Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index20090.06%
iShares Core S&P Small-Cap ETFSmall Blend
+10.52% S&P SmallCap 60020000.07%
Vanguard Small-Cap Index Fund ETF SharesSmall Blend
+9.04% CRSP US Small Cap Index20040.06%
iShares Russell 2000 Growth ETFSmall Growth+4.63%Russell 2000 Growth Index20000.25%
Vanguard Small-Cap Growth Index Fund ETF SharesSmall Growth+8.47% CRSP US Small Cap Growth Index20040.06%
iShares S&P Small-Cap 600 Value ETFSmall Value+10.44% S&P SmallCap 600 Value IndexTM20000.25%
iShares Russell 2000 Value ETFSmall Value+9.90% Russell 2000 Value Index20000.25%
Vanguard Small-Cap Value Index Fund ETF SharesSmall Value+9.26% CRSP US Small Cap Value Index20040.06%
SPDR® Bloomberg Barclays International Treasury Bond ETFWorld Bond+1.66% Bloomberg Barclays Global Treasury Ex-US Capped Index20070.50%
SPDR® Citi International Government Inflation-Protected Bond ETFWorld Bond+0.48% Citi International Inflation-Linked Securities Select Index20080.50%
iShares MSCI ACWI ETFWorld Stock+3.98%MSCI ACWI20080.33%
iShares Global 100 ETFWorld Stock+2.67%S&P Global 100TM20000.40%
Vanguard Total World Stock Index Fund ETF SharesWorld Stock+4.68% FTSE Global All Cap Index20080.09%

 

Is annualized return of 10% is too low?

Before answering, any seasoned investors will ask – ‘for how many years?’ because they want to know if it includes one or more bear cycle.

You need to understand CAGR – Compounded Annual Growth Rate.

Here’s an example:

Assume, from 2014 until 2016, your friend and you both started with 100k.

Your friend speculative stocks portfolio returned +30%, +30% and -30%

Whereas your consistent funds portfolio returned +10%, +10%, +10%

Now you go do the math.

>>> Fast forward 3 years,

Your friend are left with 118k in 2017, while your portfolio is at 133k.

CAGR wise, your friend is at 5.67% after 3 years, yours is at 10%

Who’s the winner here?

 

Difference between ETFs and index funds

You may wonder – what is the difference between investing in index funds versus investing in exchange-traded funds (ETF) where both also tracks the same index?

 Index FundsExchange-traded Funds (ETF)
What is itPassively managed mutual funds designed to mirror the performance of a market index such as the S&P 500
Hybrid investment which trades like stocks, but with diversification of mutual funds. Designed to track a commodity, index, market sector or basket of assets
LiquidityHigh. Index fund continually issues (sells) shares on demand to new investors and existing shareholders who are buying. It redeems (buys back) shares from shareholders who are selling. Very high. ETFs are traded in the same way as an individual stock
FlexibilityLow. Long only. Prices are only set at the end of the trading day based on closing prices on all underlying assets in the index funds, regardless of what time of day you buyHigh. Besides long, can also be sold short, purchased on margin, bought with limit orders and hedged with options. Prices fluctuate based on real time prices on all underlying assets during market hours on any trading day
Accessibility to small investorsLow. Many mutual funds have minimum investments of $2,500 or more, so it could be cost-prohibitive High. No minimum investment, investor can buy individual shares of an ETF, even 1 share only
Buy/sell chargesPurchase and redemption fees of 0.25% - 1.00% of the transaction amount may apply by investing directly with the index fund sponsor. Some may charge 0%. It is the recommended way due to zilch front-end or back-end loads or other sales commissions unlike actively-managed mutual funds as you don't use any investment intermediaries.*Brokerage commission of between $3.95 - $ 6.95 is the norm that applies for any buy or sell transaction because they trade like stocks. However, some ETFs are offered commission-free by certain brokerages
AvailabilityInvestors can invest directly with the index fund sponsor, but most of the time, index funds are also available through various investment intermediaries: broker, investment advisor, financial planner, bank or insurance companyInvestors do not need any investment intermediaries except an account with the brokerage offering the ETFs. The lowest brokerage commission can be achieved via online transactions
Dividend reinvestment serviceYes, normally automaticNo, unless a brokerage specifically offers it

Although the work differently, both ETFs and index funds share similar characteristics of being low cost and computer-driven. They have exploded in growth, leaving in the dust the conventional stock pickers.

In other words, the rise of passive investing in the form of exchange-traded funds, index funds and the like — has revolutionized the investment world, providing global investors with greater opportunities at lower fees while putting pressure on even the the biggest fund management companies.

More importantly, is how ETFs and index funds resolves 6 main problems associated with stock picking

Investing in Index funds and exchange-traded funds (ETFs) resolves the common blindspots in stock investing which can make you lose lots of money.

What are the blindspots, you asked?

Here I explain in detail.

Digest this and you will slowly but surely realize the effort needed to achieve identical investment returns via ETF or index funds is 10 times lesser than stock picking using value investing methodology.

Why invest in ETFs #1: The problem with using DCF method to evaluate a company stocks

Why invest in ETFs #2: Value investing fundamental analysis tend to ignore the macroeconomy

Why invest in ETFs #3: Value investing analysis blindspot of ignoring technology advancement/obsolescence

Why invest in ETFs #4: Simply buy-and-hold principle in value investing is flawed on itself

Why invest in ETFs #5: Stocks price can be manipulated by ‘pump & dump’ activities

Why invest in ETFs #6: The Stock Market has become more Efficient

Why invest in ETFs #7: Black Swan event can befall to a single stock or sector

Why invest in ETFs #1: The problem with using DCF method to evaluate a company stocks

The discounted cash flow (DCF) model is the touted valuation method to determine if a stocks is undervalued or overvalued at its current price.

However, in practice, it is often very difficult to use it. Besides the challenges of estimating all the future cash flows, it is also hard to say what discount rate or cost of capital is considered as “fair” when we try to estimate the intrinsic value.

*Intrinsic value is calculated by taking a discount to future cash flows.

Value investors use a discount rate relative to the current risk-free rate when using DCF model. Risk-free rate can be Cash Deposit rate  It seems to be reasonable since investors of equity asset should require a premium over risk-free asset. So if 10 years government bond yields 3%, and you require 5% more yield as the premium to hold a more risky asset like stocks, you might use 8% as your discount rate.

But in reality, this does NOT work unless you are investing in a vacuum.

Risk-free rate changes over time in a dramatic way. Cash deposit rate in Malaysia, for example, used to be circa 10% in the early 80’s , but today it is only less than 4%. Therefore, whatever discount rate you use for stocks, the fair value computed from that discount rate will also change over time, if that discount rate is based on the risk-free rate.

Besides, it is near impossible to speculate what the interest rate (which correlate to risk-free rate) will be in the future.

For example…

Consider the situation of emerging market countries – Brazil and Russia, where the inflation rate and bank deposit can yield 10%, stocks with 10 times P/E (Price to Earnings ratio) certainly don’t look cheap in this context. However, if some kind of hyperinflation indeed happens later for one of them, the value of any cash deposit (denominated in that currency) will be reduced dramatically when it stays at 10% per annum.

On the contrary, the real business value of a business will suffer a much lesser impact. By definition, inflation means the prices of goods go up in general, this change may not be evenly distributed, as some businesses/industries like consumer staples have more pricing power than others, say, luxury goods.

But in general and in average, a business’s value is hedged by the corresponding changes of prices, while the bond is not.

But what if a company is in a business where it has no pricing power, and its cash flow does not naturally grows at inflation rate?

Using DCF method to value a stock’s intrinsic value is useless in this sense.

The stuff taught in value investing courses – such as reading annual reports or historical financial statements of a company and analyzing the various financial ratios is equally useless if you…

  • Never care about what business/sector has pricing power, and which one has not
  • How a business prospect is going to be 10 or 20 years from now by understanding local & global macro-economy

Why invest in ETFs #2: Value investing fundamental analysis tend to ignore the macroeconomy

In reality, investors almost always have a portfolio instead of a single stock, so the value of any additional investment is relative to the other existing positions in that portfolio in terms of risk-adjusted returns.

For example, if the financial sector (typically acts as the bellwether of business cycle) is under stress, you might find a lot of cheap financial stocks. However, the value of another cheap financial stock is much less to a portfolio that is already more than 50% weighted in the financial sector than to another portfolio that has no financial stocks at all.

Furthermore, you should also consider these looming risky aspects, which value investing never teach you but you have to read the news to know:

  • You are over-exposing to 1 sector only, financial sector in this case. That is a risk by itself – concentration risk
    You fail to consider that the plunge of stocks in financial sector is limited to itself while other sectors like consumer staples maybe still doing fine.
    The business cycle is not heading into recession, so it may be a value trap in the financial sector.

In other words, while each individual stock has its own value and risk, the real risk and value investors should care about is on the entire portfolio. Just because your best idea is 3 times more attractive than your 3rd best idea, it doesn’t mean you should keep adding the former, and completely ignore the latter.

Why invest in ETFs #3: Value investing analysis blindspot of ignoring technology advancement/obsolescence

This is from Andreessen Horowitz, simplified. A historical lesson for all value investors.

Times are changing — the destructive power of technology is starting to break down companies faster than ever.

The classic case is Research in Motion (RIM). In January 2007, RIM was trading at a high 55x PE multiple. Over in Cupertino, a computer company called Apple had reinvented itself as an MP3 player company and was now unveiling a new phone set to launch in the summer.

By the end of December 2009, market share for Apple’s iPhone iOS as a percentage of US smartphone OS was 25% while RIM had increased from 28% to 41% in that same period. Though RIM had grown market share, fears of iOS growth had toppled the PE multiple to ~17x.

U.S. Smartphone market share by OS

Many traditional, value investors sat back and thought, “Well, RIM is holding up pretty well compared to the iPhone, yet their PE multiple is getting destroyed.” It’s trading at near the historical average S&P 500 PE multiple of 15x. Apple hasn’t historically been strong in the enterprise, so maybe iPhone will just be a consumer phenomenon that doesn’t break through to business users. Android is irrelevant with 5% market share. The smartphone market is growing rapidly and RIM is the clear leader. RIM is still growing north of 35% and generating nearly $2.5B in net income. I think RIM looks cheap!

Two years later, RIM was trading at a 3.5x PE multiple and topline growth had screeched to a halt. Market share for RIM had contracted to 16% while iOS and Android combined for 77% market share. In fact, in 2012, RIM posted a net income loss of $847mm. Investors lost a ton of cash and were left scratching their heads.

How did this happen so quickly? Why did net income fall off a cliff? Why now?

In 1962, Everett Rogers presented his thesis on the diffusion of innovation.

One reason: Technology Adoption is Accelerating

Innovation adoption lifecycle

 

The idea is that the adoption of new technologies follows a bell curve comprised of innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%).

The cumulative adoption of technology over time generates what is known as the S-curve. Over the last 100 years, technology adoptions have always followed this same S-curve leading to market saturation.

What has significantly changed is the rate of adoption. New technologies are being adopted much faster than ever before. While technologies from the early part of the century like electricity, automobiles and the telephone took well over 50 years to reach 50% adoption, newer technologies like Internet, PCs, smartphones and tablets are being adopted much faster.

There are several factors that go in to how fast the technology gets adopted, including how discontinuous the innovation is and the per capita income, but the reality is adoption pace is accelerating. The flip side of this is when new technologies get adopted faster, incumbent solutions die faster. Quicker adoption leads to quicker destruction of old technologies.

For example, no longer do people have the need to print out paper and file documents away in those ugly green folders; they store all their documents in a cloud service like DropBox. Printers, fax machines, paper, pens and notebooks are all items that were central to the office 15 years ago but aren’t relevant in the digital office.

Software doesn’t just challenge businesses through direct competition; they can upend businesses through a systematic digitization of the world, rendering goods and service that a company is offering obsolete.

With technology upending markets, remaining a traditional value investor is a death sentence. In the case of RIM, the company thought that their scale was defensible and stopped innovating on the operating system, favoring battery life instead. Apple’s iPhone operating system and associated software was an order of magnitude better than RIM and attracted consumers.

While there may still be opportunities for value investing, you need to be cautious of businesses that appear to be on a slow decline. With the rate of technology adoption accelerating, Internet being a way of life and software consuming the world, businesses who refuse to embrace or adapt don’t just slowly decline; they fall off a cliff and take their cash flows with them.

 

Here’s a personal example of making this mistake. I invested in RIMM using Value Investing principles in 2010 yet I still lose money. But I manage to recover my losses using sophisticated investing method.

It is a classic example where a value investor can get burnt by value traps and therefore claim that value investing doesn’t work at all.


Why invest in ETFs #4: Simply buy-and-hold principle in value investing is flawed on itself

Buffett’s successes in the past can’t realistically be repeated today as the dynamic has shifted permanently.

Let me explain.

Firstly, although value investors are supposed to hold a long-term view, as Buffett said,

“You shouldn’t hold a stock for 10 minutes if you don’t like to have it for 10 years.”,

…that doesn’t mean value investors should always hold onto a stock for 10 years. It is just that the reason for buying it should be for its long-term value.

In fact, many value investors always hope to close the value gap as soon as possible. That is why many value investors emphasize on “catalysts”.

Do you agree?

Another way to think this is that considering investing as a business, the return on investment capital is closely related to “asset turnover”. If the stock can close a 50% value gap within a year, it can be better than another stock that closes a 100% value gap in 5 years.

In other words, a stocks with catalysts might be worth a lot more than another stock without any catalysts even when they all have the same valuation on the DCF basis.

And secondly, ponder over this deeply – why do stocks have catalysts for growth, on a macro level?

An oft-disregarded fact that aided Warren Buffett’s ascendency is the unparalleled growth of the US economy from the 50s to the 90s. In a slow-growing, mature or stagnant economy, it’s much tougher to achieve outsized returns at an annual rate of 20% compounded for decades.

Size counts as well – the U.S. economy grew to be the largest economy in the world, the runway for growth is huge for American companies operating within the States itself without having to venture overseas.

One can’t realistically expect a company based in smaller country like Malaysia or Singapore that only sells its services/products locally to make one a billionaire. Most countries’ economy, even the emerging ones as we speak, have matured and the runway for growth highly limited.

Whenever you try to forecast economic growth for a certain country, simply ask yourself this:

“What is the basis for my belief that Country X’s economy/stock market will grow X% over the long run?”

Why invest in ETFs #5: Stocks price can be manipulated by ‘pump & dump’ activities

[source: Focus Malaysia July 2016]

Seasoned investors know that logic does not necessarily prevail in stocks investment. Fundamentally weak stocks can see steep rises in prices while those with good prospects can experience price slides.

The reason?

The invisible hands, aka Market syndicates doing Pump & Dump activities.

They push stocks prices up and down in a relatively short period of time.

Commonly happen to, but not limited to, penny stocks and their warrants.

For retail investors, a pump-and-dump strategy can make you feel like a fool for learning value investing.

A example: Comintel Corp (ComCorp) on 21 June 2016.

28.88% drop in the last 20 minutes of trading.

Do you know that a 28.88% drop needs a 41% gain just to break-even?

The syndicates pushed the stocks up for ‘false breakout’ to the upside with a break above the recent high of 97.5 cents to 99 cents before slamming it down to 66.5 cents.

The fundamentals are sound, its P/E ratio was 8.31 times while its net profit for Q4/2016 jumped to RM 6.11 mil Y-O-Y from RM 708k previously.

Fundamental analysis in value investing would have been useless in this classic scenario. Retail investors are at the mercy of market syndicates.

The fact is, manipulation will still exist in the market no matter how tight is the regulation. Nothing much you as retail investors can do, caveat emptor.

Possessing holding power and using average-down method is not ideal solution – they are false sense of security. Knowledge of technical analysis, however, will help a bit.

On the contrary, it will be a lot harder to manipulate an index fund or ETF due to the sheer size of it.

Why invest in ETFs #6: The Stock Market has become more Efficient

Markets today are way more efficient than the markets before mid 90’s. There was no Bloomberg, spreadsheet software, trading platform nor the Internet. Most analysis were literally done on paper with a calculator and pen. Buy/sell was done by calling your broker-remisier. Public information was available, but it was scarce as there was no Google to index information and keep it available at a few keystroke.

On the flip-side, global markets have never been more accessible today, you can invest into any companies or sectors globally without even stepping out of your room. This makes life easier (or tougher) for the budding value investor.

On top of that, there are tens of thousands of funds using highly complex (or simple) strategies to hunt inefficiencies in the markets. We can easily find any company’s annual reports thanks to Google and can analyse its financial data using Excel, we can also use various free stock screeners to screen for “value” plays. And have you heard of HFT – high frequency trading?

If you think you are are ‘fast’, there are people and machines which are even faster to capitalize on inefficient market opportunities.

Even Warren Buffett himself no longer invests in public equities as aggressively as before as Berkshire Hathaway has grown too large to have a small company move its needle. He now hunts the big game – buying out companies private-equity style to expand the Berkshire holdings.

Evidence #1 stock market is becoming more efficient

[source: At BlackRock, Machines Are Rising Over Managers to Pick Stocks]

Even the largest asset management company in the world, Blackrock concur to this fact and that is why it is shifting to ETFs / index funds

In March 2017, Blackrock, the company behind the many ETFs above, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

Some $30 billion in assets (about 11 percent of active equity funds) will be targeted, with $6 billion rebranded BlackRock Advantage funds. These funds focus on quantitative and other strategies that adopt a more rules-based approach to investing.

“The democratization of information has made it much harder for active management,”

Founder, Chairman and CEO of Blackrock, Laurence D. Fink said in an interview.

“We have to change the ecosystem — that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.”

The casualty from the restructuring?

7 of BlackRock’s 53 stock pickers are expected to step down from their funds. At least 36 employees connected to the funds are leaving the firm.

Now the biggest fund companies are Vanguard, the indexing pioneer, and BlackRock, which together oversee close to $10 trillion in assets.

He concluded:

“The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy — that does not work anymore,”

“These are stormy seas for active managers, but we at BlackRock are an aircraft carrier, and we are going to chart our way through these seas.”

Evidence #2 stock market is becoming more efficient

[source: Why I sold $400,000 Of Berkshire Hathaway Shares]

Andrew Hallam, author of the globe trotting Millionaire Teacher was–and continue to be–a fanatic fan of Warren Buffett. But in January 2011, he sold every share. At the time, they were worth almost $400,000. He channeled the proceeds into Vanguard’s Total Stock Market Index ETF.

He admitted that such move might sound crazy for most people. After all, Berkshire Hathaway had long outperformed the U.S. market.

In 2010 something dawned upon him while he was researching for his first book Millionaire Teacher. At the time, his portfolio consisted of individual stocks and index funds. But the research was clear. Few people beat the market over time. It was easier in the past, when fundamental techniques were far less refined.

According to Hallam, Larry Swedroe and Andrew L. Berkin explained this in their 2015 book, The Incredible Shrinking Alpha: And What You Can Do To Escape Its Clutches. The authors have a lot of respect for history’s great investors. “They were decades ahead of their time. They learned that you could beat the market by picking small stocks or value stocks or quality stocks with increasing price momentum.”

But today, most active managers know that. Swedroe and Berkin say the market has changed. “Today, professional investors account for as much as 90 percent of stock market trading. And each decade, they get better and more sophisticated.”

Hallam said he did not own individual stocks which may sound boring to other investors. But he finds excitement elsewhere.

Why invest in ETFs #7: Black Swan event can befall to a single stock or sector

Let me give you an excellent example of a black swan event other than Brexit and Trumponomics.

Imagination Technologies Group plc is a British-based technology R&D company, focusing on semiconductor and related intellectual property licensing.

However, shares in Imagination were in free-fall on 4 April 2017 morning after Imagination confirmed it would lose its biggest customer by 2019. In a press statement, it said “Apple is of a view that it will no longer use the group’s intellectual property in its new products in 15 months to two years time, and as such will not be eligible for royalty payments under the current license and royalty agreement,”

apple ditched imagination tech st

There is no way anyone could have seen that coming

Roughly half the company’s revenue derives from a licensing deal with Apple.

Apple told the company that it is “working on a separate, independent graphics design” so as it can ditch Imagination Technologies and take more control of its products

Shares in Imagination were down 65 percent following confirmation of Apple’s decision to rip up its contract with the firm. In 2016, Apple paid nearly £60.7 million (about $75.8 million) in royalties to the British company, which reported total sales of £120 million (about $150 million) for the 12-month period.

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