The Dumbest Trade You Can Make?

Bloomberg and Barron's each had similar articles about straying off the beaten path toward ETFs that are not the plainest of vanilla. 

According to the Bloomberg article, only 62% of the 1080 "newly launched quant-powered investing styles" showed a positive return going into the end of 2024. That's pretty vague. How many of those funds are inverse? Many of the derivative income funds have positive total returns but can't keep up with the distributions on a price return basis and the article doesn't distinguish between total or price return. 

There is also the issue of timing. Some sort of narrow based index fund is not going to somehow magically go up when its segment is going down. Bonds didn't do well so if any of the funds they are talking about track some segment of the bond market, they might have gone down too. There are some very sophisticated interest rate funds that bet on the curve steepening or flattening. A fund like that might work exactly as advertised but if it's on the wrong side of the market then it too will go down. 

Barron's cited work done by Jeff Ptak and used the word thematic to say that these funds tend to underperform. The poster child for this and addressed in the article is the Ark Innovation ETF (ARKK). The fund was a moon shot to start and has done poorly since. One client owns it on a mandate. I could not talk them out of it. Their timing was good though, it went up a lot, I took their original dollar amount out of the trade and they've been riding the rest mostly down. 

Oddly, Barron's included some industry funds in their discussion of thematic funds and mentioned some that have done very well including iShares Medical Devices (IHI) which I've owned for clients for 12 or 13 years. I guess it could be a theme but is also allowed for avoiding heavy exposure to domestic pharma. I wrote an article for Motley Fool in May of 2004 saying I didn't want to own the stock and spelled out why. Since then, the stock appears to actually be down...21 years later and it's down? The article shows being updated in 2016 but not by me, the URL has the 2004 time stamp. So avoiding something was part of the catalyst to by IHI which argues not a theme but there is a demand component there based on an aging population which argues in favor of it being a theme. 

One that hasn't worked out very well is the IPAY ETF, digital payments.

Something like IPAY, you'd buy it as something you think will outperform the market as opposed to something like a utility sector ETF or maybe some sort of narrower space within utilities or staples maybe. There's a food ETF with symbol PBJ that has lagged the S&P 500 by a lot but has lower volatility, lower beta and was up in 2022. 

I've owned Mastercard for clients since long before IPAY came on the scene. MA has been a lucky holding but someone buying IPAY would probably want to see it above the green line although obviously is was early on. I don't know the fund well enough to know what changed. Also noteworthy on the chart is that while MA has done well over the almost ten years captured in the chart, it has had long periods where it has languished. When you see a stock up a ton over some long period and think I wish I'd just bought and held on, yes that works for the right companies but there will be periods of frustration. 

And finally I found someone who hates bonds more than I do. This Barron's article quoted Joe Sullivan from Allspring as saying passive investing in bonds “about the dumbest trade that you can make.” So, it's not quite the same thing because he is a bond manager but I thought the quote was hysterical. 

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