I’ve had enough of ETFs but it’s not for the reason you think

Many will know me as a strong ETF advocate. But I’ve had enough of recommending ETFs as an investing option to people. 

ETFs still count high on my list for DIY investing for its souped up diversification and cheapness. It ranks above self stock selection and unit trusts. 

But there is one single biggest reason why ETFs also fall into the same trap as the other schemes and it has nothing to do with high finance: inconvenience

Convenience, or more accurately not succumbing to behavioural sabotage, is a big factor if you want to ace at gaming your financial future. It’s kinda like if you want to get seriously fit, you make sure you join a gym that isn’t a big commute to get to. The ones in the same building where you work are best. I personally take convenience to the extreme by running barefoot or slipping on a pair vibrams. No specially packed gym clothes, no gym bag, no expensive memberships, no battling with traffic, Just Do It as Nike pithily puts it.

I even go so far as to say that convenience tops diversification as the single biggest critical factor for investing success. While some kind of diversification is easy to get going by assembling a portfolio of a few stocks, actually making yourself do it regularly is a different ball game altogether. 

Inconvenience will impede powerful compounding effects if you feel lazy sometimes to put your money to work. Or worse, your lax discipline totally defeats the long term strategic process by making you buy high and sell low. 

There are a few reasons why buying ETFs is highly inconvenient:

  1. They are usually listed in a foreign currency, typically the US dollar but also in other hard currencies. You will be tempted to sacrifice the longer term strategic imperative of getting invested for shorter term tactical FX decisions. Meaning you’ll start to bet on better FX rates. 
  2. ETFs in certain countries like Hong Kong and Singapore trade at fixed minimum quantities of say 2,000 shares which might not match your investment size perfectly, again, pushing you into behavioural danger zones. You can’t buy fractions of shares.
  3. Related to the above, the price of ETFs may be too expensive for your regular savings, requiring you to accumulate enough to buy one lot/share and leaving your cash in uninvested limbo. Eg The Vanguard S&P500 ETF price is about US$275 or RM1,140 at the time of writing. This may be too expensive for the average monthly Malaysian savings especially when the next reason is considered. 
  4. You don’t have allocational efficiency. Think of all the above issues and try to replicate it across a few ETFs to accurately represent your asset allocation (diversification into different asset classes) which is needed to optimise your risk-return preference. 
  5. You also can’t rebalance efficiently. One ETF doing better than another will most definitely happen. This will require you to buy/sell ETFs to adjust holdings back to your intended allocations PLUS consider allocations for new savings. If this isn’t done your risk taking would just go out of whack. Trying to do such complicated maths at home will surely get you hurt . 

The good news is that robo advisors can help iron out these complications. Like Nike, robo advisors allow you to just do it, allocating and rebalancing your investments perfectly without any size restrictions. The user experience is also going to be much pleasanter, cheaper and faster than using a broker’s trading platform.

2 thoughts on “I’ve had enough of ETFs but it’s not for the reason you think”

  1. I have moved on over time from stupidly expensive offshore funds to slightly less expensive local unit trusts…and finally to ETFs…wish I had known about them earlier, but they are still relatively new, especially in Malaysia. Anyway the biggest inconvenience for me is the significant and unclear costs to TT money abroad to buy ETFs…and the online limit of 10k per transfer…but it’s still absolutely worth it. Not so cost effective for smaller amounts.
    When will you be launching your robo adviser ETFs?!

    Like

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