Recent Investment Commentary {Part IV}

Here's part IV of the investment commentary we sent out last week.

With that being said, there are enormous advantages to ETFs, especially during volatile times.  We can invest during such periods knowing we are buying a diversified portfolio of assets, backed by the value of an underlying index while removing single stock risk.  The history of equities tells us they can be wracked by fraud, can trade to zero due to a catastrophic loss or be rendered obsolete by unforeseen technological change.  It is an extremely low probability event that a plain vanilla ETF, especially one with a long trading history and based on a well-established index, will suffer such a catastrophic event causing it to lose all value.  We say this is a low probability event because 30 years of investing tells us there are no guarantees.  However, the inherent value of the underlying assets and the unique creation and redemption process of ETFs make this unlikely. Because the underlying assets supporting ETFs have value, we can use our systematic approach to creating portfolios and strategies from this asset class.

Yield is also an underestimated portion of ETF returns.  If for example you buy an ETF based on the S&P 500*, such as the SPY, you are paying for an index that has historically grown its earnings in the 5-7% range, historically grown its dividend about 5% a year on average and currently pays nearly a 2% dividend.   If the market trades sideways in 2016 you would still have a security that pays you the same yield as current bonds but with a longer-term equity kicker.  That is the power of ETFs.

We'll post the conclusion to this letter tomorrow.  

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.