An article in today's WSJ - Picking Stocks Becomes Tougher (paid subscription required) - outlines the views of three market strategists that ETFs make more sense now than ever. Their arguments:
Wells Capital Management strategist James Paulsen did a study of the monthly price change of each component stock of the S&P 500 over 20 years to calculate the average difference or "dispersion" among the individual stocks' performance. His results:
- Dispersion in April was 7.9%
- The all time high (mid-2000) was 20.9%
- Recent peak (mid-2002) was 18.7%
- The 16-year low was about 5%
Conclusion? Low dispersion means its far harder to make (and lose) money with individual stocks. That makes indexing (including owning ETFs) more compelling, as the cost of stock picking is even less worthwhile.
Riley Asset Management CEO Ned Riley says he is currently investing his own money as follows:
- 40% in SPY
- 20% in QQQQ
- 40% in sector ETFs
Fifth Third Asset Management strategist Jim Russell recommends that investors use an S&P 500 fund (such as IVV or SPY) as the core of their portfolios. He expects the S&P 500 to return about 6% this year.
Ned Riley's use of QQQQ is baffling. Here's why.