The recent rise to prominence of ETFs has been a boon for investors who want to take a diversified approach toward investing in a hot industry or sector. Want to invest in biotech? There’s IBB. Interested in betting on the housing comeback? You can buy XHB. You can even play the solar sector with the cleverly named TAN.
And now you can use an ETF to invest in something different: strength, stability and longevity.
Invesco PowerShares recently announced the launch of a new ETF based on the New York Stock Exchange’s century index, which includes companies that have a market capitalization of at least $1 billion, have been incorporated for at least 100 years, and are listed on major U.S. exchanges. Over the last three years, according to NYSE Euronext’s data, the century index has outperformed the S&P 500 (^GPSC), Dow Jones industrials (^DJI) and the Nasdaq composite (^IXIC)by a wide margin.
The list of companies that will be held by the new ETF, which goes by the symbol NYCC, has yet to be released, but the century index includes 372 stocks, among them such venerable names as Coca-Cola (KO), Macy’s (M), Monsanto (MON), Wells Fargo (WFC), General Mills (GIS) and IBM (IBM).
Of those stocks, 48 percent are mid-caps and 41 percent are large caps. The four largest sectors represented are financials at 24 percent, industrials at 20 percent, and consumer and utilities, both coming in at 10 percent. Technology and telecom names are minor players: Combined, they make up less than 5 percent of the index.
This ETF may be a good option for investors who want long-term exposure to the broad market, but who also seek safety from economic downturns.
“The PowerShares NYSE Century Portfolio invests in household names that have defined the American economy for more than a century,” says Invesco CEO Martin L. Flanagan. “We believe NYCC offers investors targeted exposure to companies that have demonstrated the ability to innovate, transform, and grow through decades of varying economic cycles, political conditions, and social change.”
Designed as an equally weighted fund, the ETF gives the same importance, or “weight,” to each stock in the overall allocation. This decreases the fund’s exposure to stocks that are overvalued, while increasing exposure to those that are undervalued, which helps to provide stability.
There’s currently no other ETF that competes directly with NYCC. But before you buy it, be aware that with an expense ratio of 50 basis points (meaning it costs $50 for every $10,000 invested), it’s much less cost-effective to own than the majority of other U.S. based ETFs.
NYCC represents a different way of thinking in the world of ETFs and, if successful, with the investing public, might spawn a new generation of value-focused funds.
Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.
1. Compound interest is what will make you rich. And it takes time.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.
The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That’s totally unknowable.
Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?
If someone said, "I think most people will be in a 10% better mood in the year 2023," we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
2. The single largest variable that affects returns is valuations — and you have no idea what they'll do
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.
3. Simple is usually better than smart
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
4. The odds of the stock market experiencing high volatility are 100%
The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.
"Everything else is cream cheese."
5. The industry is dominated by cranks, charlatans and salesmen
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