Latest news with #Sotiroff
Mint
5 days ago
- Business
- Mint
How index-fund investing turned into an extreme sport
Peter Lynch, the former portfolio manager of Fidelity Magellan Fund, has long warned investors against what he calls diworsification: cluttering a portfolio with too many investments. I think many investors should worry instead about deversification. That's the opposite of diversification. Rather than spreading your bets, you concentrate them—and that can be dangerous. Deversification is sweeping through the world of exchange-traded funds. Investing in an ETF that tracks only a few stocks—or even just one—is a lot more exciting than holding an index fund that owns every stock in the market. It's also a lot riskier. Back in 1998, according to Daniel Sotiroff, a senior analyst at Morningstar, 85% of stock-index funds were weighted by capitalization. The biggest stocks had the heaviest representation, as in the S&P 500. By the end of 2024, only 40% of index funds were capitalization weighted. The median, or typical, index fund held 503 stocks in 1998, Sotiroff found. By May 2025, that had shrunk to 123 stocks. The more recently an ETF launched, the fewer stocks it tends to own. 'A lot of newer investments are taking on more risk than investors may realize," Sotiroff says. The irony is that many people worry about how concentrated the S&P 500 is in only a handful of huge tech companies. They then turn around and concentrate their own portfolios in an even riskier handful of stocks. Let's be clear: Bundling a limited number of stocks inside an ETF doesn't make them safe. The fewer stocks you hold, and the farther away from the overall market you move, the more extreme your returns are likely to become. Your potential gains are greater, but so are your losses. Between 1985 and 2024, the average stock suffered a maximum interim decline of 81%, and more than half never regained their previous highs, according to analysts Michael Mauboussin and Dan Callahan of Morgan Stanley. What's driving the wave of deversification? Fund managers want to earn higher fees than the pittance they can make running an S&P 500 or total stock-market index fund. And many investors are chasing higher returns—and more excitement than they can get from a traditional index fund—by focusing their bets and taking bigger risks. We now have ETFs that capture the returns of heating, ventilation and air-conditioning stocks; own convertible bonds issued by companies that hold bitcoin in their corporate treasury; use borrowed money to buy already leveraged loans; follow an index of small-to-midsize uranium stocks; track the future cost of transporting crude oil by sea; and replicate the performance of Icelandic stocks. Although some are actively managed, many charge fees 20 to 30 times higher than a traditional index fund. The ultimate in deversification is leveraged single-stock ETFs. They typically seek to double or triple the daily performance of only one stock. (A few aim to amplify the opposite of its return each day.) When these funds rolled out in 2022, they jacked up the returns of giants such as Apple, Microsoft or Tesla. 'Now we have gone far, far down the capitalization scale," says Todd Sohn, an analyst at Strategas Securities, 'toward much more volatile names." ETFs launched in the past couple months seek to double the daily returns of such tiny, hyper-risky stocks as electric-aircraft maker Archer Aviation, computing provider D-Wave Quantum, nuclear-power developer Oklo, voice-recognition company SoundHound AI and lending platform Upstart Holdings. In their brief lives, these funds have generated cumulative returns ranging from a 26% loss to a 226% gain. As of this month, more than 100 leveraged single-stock ETFs manage a total of more than $23 billion. So far, those funds constitute only about 0.2% of total ETF assets, according to Sohn. But their average daily trading volume has more than doubled in the past year, to nearly $9 billion. They aren't the only deversification danger. ETFs that don't use leverage and are linked to narrow market segments rather than a single stock are risky, too. ETFs tracking indexes of cannabis stocks lost more than 90% between 2019 and 2023. ETFs following solar-stock indexes have fallen more than 70% at least three times. Index funds that use such factors as equal weighting (tilting toward smaller stocks) or momentum (rapid price appreciation) have suffered deeper drops than the overall market. Nevertheless, money keeps pouring into quirkier index funds. Last year, $132 billion went into non-market-capitalization-weighted index funds, according to Morningstar. Another $25 billion flowed in during the first five months of 2025. When you buy a narrowly focused ETF, you're making an active bet on the direction of a particular market or asset. You've become deversified. And that can easily turn into speculation. Unlike many other pleasures, speculation isn't illegal, immoral or even fattening. Speculating on stocks also beats the lottery or casino, where your odds are even worse. It can be educational, engaging and just plain fun—for as long as the profits last. But it's putting you at risk. In fact, the more fun speculation feels, the more likely the profits are about to fizzle. If you must speculate, bear a few things in mind. First, amplifying the risk of single stocks can make you a ton of money when the market is going up. It will wipe you out when the market goes down. Limit your bets to a maximum of, say, 5% of your total assets. That way, you'll make a lot if you bet right but can't wreck your financial future if you turn out to be wrong. Finally, don't fall for the delusion that an ETF owning some but not all of the market is diversified. It's deversified.
Yahoo
27-06-2025
- Business
- Yahoo
Why Investors Should Be Cautious as ETFs Grow More Complex
As exchange-traded funds push further into niche markets and use derivatives or other complex strategies, financial advisors and investors need to use caution before they buy. Two Morningstar analysts warn investors that there have been a spate of ETF launches that may do more harm than good. Dan Sotiroff, senior manager research analyst for Morningstar, said, in some cases, niche strategies may be worthwhile investments but, 'Increasingly, what we're seeing is appealing to people's worst behaviors, speculation, gaming … ETFs with two-times leverage.' David Carey, manager research analyst for Morningstar, concurred, pointing to examples such as riskier, single-stock or derivatives ETFs, which can get investors in trouble. 'An ETF wrapper doesn't fix a bad strategy,' he said, later adding, 'I think investors still need to be just as cautious about ETFs than they ever have before.' Carey and Sotiroff spoke Wednesday at the Morningstar Investments Conference in Chicago about how ETFs have evolved. Sotiroff said with the big fund-issuers like Vanguard, BlackRock and State Street Global Advisors having launched the basic ETFs investors use, smaller fund companies are looking for ways to get business. 'Increasingly, we're seeing a lot of stuff that Vanguard, BlackRock or State Street won't touch,' he said, adding that many of these sketchy ETFs have maybe a few million in assets, which leaves them at risk of closing. The easy advice, Sotiroff said, is for investors to stick with tried-and-true investments and avoid ETFs if they don't understand the investment process. Carey said the other big trend in ETFs is that active ETFs are here to stay, noting that during the first five months of 2024, 38% of all ETF flows have gone into active ETFs. 'It's not only the asset managers that are saying this from a top-down perspective and just giving clients all these different choices to connect to ETFs. It seems that investors are also more willing to invest,' he said. As investors look at new ETFs, both analysts said they should look closely at the team managing the strategy, see that it's a proven strategy, that the team has the resources to implement it and that they are willing to admit mistakes. Investors should look for managers with experience in several market cycles and processes that are easy to understand and | © Copyright 2025 All rights reserved Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
20-06-2025
- Business
- Yahoo
Vanguard Dividing Fund Lineups Between Two Teams
The Vanguard Group is dividing its multi-trillion dollar lineup of ETFs and mutual funds—which includes the world's largest ETF, the Vanguard S&P 500 ETF (VOO)—between a pair of investment advisor teams for the first time, as asset managers encounter an investing landscape reshaped by technology and the demand for fresh products. Vanguard, the world's second-largest asset manager with $10 trillion across a range of funds, is creating a pair of teams called Vanguard Capital Management and Vanguard Portfolio Management, according to a statement. Both had previously been under a single entity, The Vanguard Group. As Vanguard turns 50 years old, asset managers are confronting challenges, including surging demand for exchange-traded funds, slowing mutual fund inflows, active fund growth, and surging investor interest in cryptocurrency and technologies like blockchain that may replace physical assets in some cases. Vanguard, the No. 2 ETF issuer behind BlackRock's iShares, has also come under criticism for a failure to improve aspects of its customer service. 'Their mammoth size now requires more focus than a single team could handle,' Daniel Sotiroff, CFA, Morningstar Direct senior manager research analyst, wrote in a note. Vanguard manages both the world's largest ETF, the $681.6 billion VOO, and mutual fund, the $1.8 trillion Vanguard Total Stock Market Index Fund (VTSAX). The sheer size of the Malvern, Pennsylvania-based company's holdings is creating other problems, Sotiroff noted. Vanguard owns big stakes in most publicly traded stocks and, with some of those stakes exceeding regulatory limits, the company may have to cap ownership of some stocks, he wrote. 'They may not track their target index as accurately as they had in the past,' Sotiroff wrote. 'Likewise, it may restrict an active manager's ability to express their best ideas.' Vanguard Top 5 ETFs—Source: FactSet Vanguard Capital Management will include fixed income led by Sara Devereux, and global equity index management led by Rodney Comegys. Vanguard Portfolio Management will include Quantitative Equity Group, and will also lead Strategic Equity Index Management led by John Ameriks. They will report to Vanguard President and Chief Investment Officer Greg Davis. Vanguard, with $3.3 trillion in 92 exchange-traded funds, said the changes take effect next year. Note: Second-to-last paragraph recast to better reflect groups' structures. Permalink | © Copyright 2025 All rights reserved Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
09-06-2025
- Business
- Yahoo
Issuers File for ETFs Tracking Newly Debuted Circle Stock
Circle Internet Group Inc. (CRCL) may have just made its debut as a public company last week, but that hasn't stopped fund providers from looking to launch exchange-traded funds based on its stock performance. On Friday, Bitwise submitted a preliminary prospectus to the Securities and Exchange Commission of the Bitwise CRCL Option Income Strategy ETF, an actively-managed ETF that tracks the share price of Circle using a covered call strategy. On the same day, ProShares submitted a filing for the ProShares Ultra CRCL ETF, a 2x leveraged fund also tracking CRCL. The management fees and tickers weren't shared in either filing. The effective dates would be August 20, 2025. Bitwise declined to comment to as it's in a quiet period. ProShares and Circle did not respond to requests for commentary. Founded in 2013, peer-to-peer payments company Circle is the issuer of USDC, the second-largest stablecoin. It's one of the few pure-play crypto companies listed on the U.S. stock market. Circle's shares were priced at $31 Wednesday and opened at $69 on the New York Stock Exchange amid investor demand. Funds like the Bitwise CRCL Option Income Strategy ETF and ProShares Ultra CRCL ETF are aimed at very short-term speculative investors, and should be avoided by most other investors, said Daniel Sotiroff, senior manager research analyst for Morningstar Research. Leveraged ETFs, he explained, tend to succumb to volatility drag and perform poorly over the long run. 'It always goes wrong,' Sotiroff added. 'I've never seen those things work.' When it comes to covered calls, they're typically a play on yield: The more volatile the underlying asset is, the higher the premiums are that you're going to be able to write, he said. 'There's a lot of this stuff out there, and it fits into the same mold of stuff that investors should ignore—and they'll be better off for it,' said Sotiroff, who recently analyzed the 4,000 ETFs that traded on U.S. exchanges at the end of March 2025 and found that only 461 of them might be considered good, long-term | © Copyright 2025 All rights reserved Sign in to access your portfolio
Yahoo
16-04-2025
- Business
- Yahoo
Vanguard, Blackstone, Wellington Partner on Private Assets
Fund giant Vanguard is teaming up with alternative asset manager Blackstone and Wellington Management to develop multi-asset investment solutions that integrate public and private markets to investors. The goal is to build 'fully diversified portfolios that incorporate private assets and pursue higher returns,' according to a Blackstone news release. The firm didn't share any information on what these solutions would be, but said that those details are expected to be announced in the coming months. News first broke that The Vanguard Group was reportedly holding talks with two of the world's biggest private equity companies about offering private assets to investors in March. Vanguard has a long history of disrupting the investing industry by providing access to investors and driving fees down—and doing so in the private marketplace is the next natural step for the company, Daniel Sotiroff, senior manager research analyst at Morningstar Research, told 'This is a big opportunity for them,' Sotiroff said. 'I think it's also kind of a test.' The firm's CEO Salim Ramji joined just last year, and the industry is watching to see if Vanguard still executes in the way we expect—low-cost, well-managed and transparent with the right vehicles, he added. Instead of relying solely on its own capabilities, Vanguard is partnering with Blackstone. It's a move that Sotiroff said isn't surprising given Blackstone's size. 'When you consider the scale that Vanguard operates at, you need somebody that's really big that can handle a lot of deals and handle a lot of private assets,' he added. 'It makes sense that they would partner with one of the bigger players in the space and they would go with somebody who has a pretty big reputation.' Throwing Wellington into the mix was a bit of a curveball, Sotiroff said. But considering Wellington has been Vanguard's go-to sub-advisor for equity products and the two companies have a long history, the move also makes sense. Vanguard isn't the first to explore private asset solutions. State Street and Apollo Global Management launched the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) earlier this year, which aims to invest in private credit among other instruments, for example. But shoehorning an illiquid asset into a highly liquid ETF vehicle doesn't tend to work, so Sotiroff highly doubts the new offerings from Vanguard, Blackstone and Wellington will be in an ETF vehicle. He speculated it might be something like a tender offer fund, interval fund or a collective investment trust (CIT) for retirement. Wellington spokesperson Robyn Tice told the firm cannot comment on the details of any specific solutions that are not yet | © Copyright 2025 All rights reserved Sign in to access your portfolio
