Know ETFs' LimitationsETFs are just one tool available to investors. Others include stocks, closed-end funds, OEFs, structured products and unit investment trusts. As much as I believe ETFs help empower investors to get better results, they will not always be the best possible tool to capture specific parts of the market. I mean that geographically in particular. While there are several ETFs that give investors broad exposure to regions such as China, Austria and Canada, there are some gaps. For example, Ireland offers a healthy and growing economy with a pro-business government, and is one of the wealthiest countries in Europe per capita. Yet there is no ETF that U.S. investors can easily access. There is a CEF, The New Ireland Fund ( IRL), and there are several NYSE-listed ADRs. I capture this market for clients with one of the ADRs. Norway is another important investment destination because it is a huge oil producer. But the only way to gain exposure to this country's economy in the public markets is through a very few ADRs. There are no ETFs, CEFs or even OEFs I can find that isolate Norway.
Managed ETF ProductsRecently, several brokerage firms and banks have rolled out products that offer managed all-ETF portfolios to clients. I studied two, Ameritrade's Amerivest program and the Fidelity ETF Portfolio Builder, and found some significant disadvantages to them over just investing in ETFs outright. In general, this group of products are computer-generated allocations of specific ETFs that attempt to capture a diversified portfolio. For most, investors complete a questionnaire that allows the program to establish an ETF portfolio based on risk tolerance and time horizon. The result will be a group of seven to 10 broad-based ETFs ranging from iShares S&P 500 ( IVV) to iShares Russell 2000 ( IWM) to iShares EAFE ( EFA). But a computer-generated, automatically rebalanced portfolio that can assess only past performance of the ETFs in its stable of choices gives investors no forward-looking analysis, and that's a major negative. What's more important, where the component ETFs have been or where they are going? Consider this simple analysis: Several strategists have said the next few years will offer below-average returns for U.S. equity markets. An investor who buys into this line of thinking may want to overweight dividends. That type of simple forward look hardly requires a CFA designation, yet a computer-run product can't offer even that much analysis.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider The New Ireland Fund to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.