Newport Capital Advisers

Is long-term equity investing dead?

Very probably it is not, although it has very few advocates in today’s especially uncertain economic environment. The desire for nearly instant profits from a risky investment such as equity has heightened interest in strategies that may engage in rapid trading as investors seek to earn profits daily in what has become a highly volatile equity market with relatively limited liquidity against the economic backdrop that has many structural problems with very uncertain growth prospects. This very near-term focus may be one reason that equity valuations appear to be low and why the highest quality corporations that require no external financing have dividend yields on their common stock that exceed the yield-to-maturity of ten year US Treasury Notes. The fact that the S&P 500 has produced a loss for a decade has reinforced the aversion to stocks, if the mutual fund outflow from equity funds and into the perceived safety of fixed income funds or cash equivalents in the two years since the financial panic of 2008 can be used as evidence.

Are Exchange-Traded Funds (“ETF’s”) the best way to access various sectors of financial markets, including equity sectors and indices, fixed income securities and other sectors including gold and commodities?

ETF’s have become more popular to access market sectors because they offer diversification and relatively high liquidity. ETF’s are generally more tax-efficient than mutual funds. The sponsors of ETF’s charge fees that investors should understand. As with any investment, one should understand the risks associated with ETF’s. Sector selection is very important and ETF’s offer a wide variety of sectors. Of course, there are mutual funds that have performed better than their respective sector or index after all fees, but selection risk is clear, as many do not perform better. An ETF investor must accept the high probability that an ETF will not perform better than the sector it replicates, if for no other reason that it charges a fee. In short, ETF’s offer the investor a vehicle that may well complement and add diversification to a portfolio.