Strong reasons not to invest in non-broad market ETFs

Earlier in my ETF-related article, I asuggested that investors should only choose ETFs that track the broader stock market; do not invest in non-broad market ETF. This article wants to explain my thoughts clearly.

I suggest you see the most important article about ETFs in my blog “Most investors should invest ETFs tracking broad market“.

Table of Contents

ETF is too popular

The main reasons for the design of ETFs are to allow investors who are unable to actively select stocks to find investment performanceon on par with market performance and reduce investment risks (that is, the severe stock price volatility of individual stocks). However, because the global ETF issuance is becoming more and more popular with investors, issuers have all spared no effort to design ETFs with all kinds of constituent stocks to attract investors.

Loss of benefits and advantages of ETFs

It is not recommended to invest in ETFs in any specific field, industry, or geographic area. The main reason I hold is very simple; investing in non-tracking broad market ETFs will lose the benefits and advantages of investing in ETFs. This approach is actually the same as investing in individual stocks. It will also cause investors to go back to the original point and turn the headache of “selecting stocks” into “selecting ETFs.” This caused the problems that ETFs were designed to solve in the first place, but they were not resolved in the end.

Scrape the barrel

In addition, the constituent stocks of non-broad market ETF are uneven, and it is very common to scrape the barrel. You must be forced to buy some poor constituent stocks that wealth management companies forcibly add to the constituent stocks for various reasons (saying it will scare you). But investors have no choice and are forced to buy constituent stocks they don’t like. In the world of investment, any forced buying is the beginning of failure, and it must end badly.

A few days ago, I pointed out one of the most popular electric vehicle ETFs, it has 20 constituent stocks. There was even Sinosteel in it. I asked the issuer why? The answer they gave me was “because an electric vehicle is a car, the car needs steel.” It is also unreasonable for me to ask that the component stocks do not have Texas Instruments (ticker: TXN). People in the automotive industry know that Texas Instruments is a major supplier of automotive chips, but I have not received any reply. Please see the post “How does Texas Instruments make money? Amazing long term capital reward and company net profit margin!“

Non-broad market ETF turn into hype

Today, the whole world is crazy for metaverse and electric vehicles, and there are countless issuers on the market launching related ETFs to catch up on the trend and win the favor of investors. When the trend recedes, soon or later, from couple of quarters to 2 to 3 years; this kind of ETF launched with the trend will definitely be abandoned by the masses, and the market value will shrink significantly. It is definitely the investors’ pockets that are hurt. There are too many examples in history to prove it, so I won’t give examples one by one here.

It makes things complicate

In short, non-broad market ETF complicates simple issues. Anything or something in the world, the more complex, the greater the chance of error. On the road to investment, this principle holds true.

Conclusion

The investment guru John Bogle who founded the world’s first ETF. John Bogle suggested that everyone invest in ETFs with the widest coverage, and not chase ETFs with any concept, because when a concept becomes popular, it is often when the price is on the high side, and investors are right in the middle of an ambush. In short, investors should never think that they are smarter than others.

Disclaimer

The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.