Index-based ETFs don’t actually beat the market and they’re not liquid, analyst says
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There are many types of exchange traded funds (ETFs) but one increasingly popular type is index ETFs. These funds attempt to replicate an index and beat it.
But Wealth Within’s chief analyst Dale Gillham believes it can’t be done and you’re better off just directly buying these stocks.
“An ETF cannot beat an index, because if they’re investing in the ASX200 they’re either buying all of the 200 in the weighting, or they take positions using some form of derivative to give a cover of the index,” he told Stockhead.
“At the end of the day they’re trying to match what the market’s doing, and theoretically what its doing they’re doing.”
“But they’re charging fees. Investors don’t understand the fees are wrapped up in the ETF because no one does what ASIC requires without a fee.”
“But if you just buy and hold the top 10 [stocks] you’ll beat the market in a 10-year period.”
Gillham was quick to clarify he was not against ETFs generally, particularly specialist ETFs. He named robotics and AI as two examples.
But he warned investors had to do their homework and learn from relatively recent history. He said in the 12-18 months prior to the GFC, record capital came into managed funds and once everyone wanted out – it couldn’t happen.
“All the industry did is reinvent itself,” Gillham said. “ETF is just a managed fund, but traded on an exchange.”
“Institutions don’t buy ETFs, so the only people buying in them are every day investors. If they’re panicking, either no one will want to buy it or if they do they won’t pay a high price. I see this as a huge issue.”
“In any stock market crash you can always sell the top stocks, even on the worst day. But nobody can do that with managed funds – Mum and Dad get screwed at the expense of the big end of town.”