Investors Suffer with Too Many ETF’s —-Contributor Tim Fortier
Unlimited choices produce genuine suffering according to Dr. Barry Schwartz.
In his book Paradox of Choice Ă˘â‚¬â€ś Can Having Too Many Choices Make You Unhappy, Dr. Schwartz argues that more choices make us more uncertain about our choices. And this leads to increased anxiety and suffering.
Investing already produces anxiety for many investors. So adding more choices without a solution for managing them seems to make the anxiety grow and grow. And this is especially true when it comes to Exchange Traded Funds (ETFs).
ETFs are the fastest growing segment of the investment industry. And with over 1,300 funds to choose from Ă˘â‚¬Â¦ no wonder investors stay anxious in these markets.
Assets in ETFs reached the trillion-dollar milestone a little over a year ago. Approximately 99% are in passive index funds. And a recent report by U.S. consulting firm McKinsey & Co. indicates that active ETFs alone could hit $1-trillion (U.S.) in assets within a decade. And as money races out of mutual funds and into ETFĂ˘â‚¬â„˘s Ă˘â‚¬Â¦ more assets will lead to more funds and more choices.
And according to Schwartz Ă˘â‚¬Â¦ more choices will make you unhappyĂ˘â‚¬Â¦ and the suffering will continue.
I am not against choice or even the influx of new ETFs. I believe investors have never had it so good. ETFĂ˘â‚¬â„˘s provide a unique way to hedge downside risk without having to short stocks or buy put options.
And so now investors can even profit from market declines through inverse ETFs. ItĂ˘â‚¬â„˘s never been easier to build a well diversified portfolio.
Removing Market Noise Reduces Investment Anxiety
More choice is good thing for building profitable portfolios. But choices have to be managed effectively to reduce anxiety. And this is where systematic screening can quickly cut through market Ă˘â‚¬Ĺ“noiseĂ˘â‚¬Âť and remove the irrelevant choices.
One simple approach is Relative Strength filters. These can easily reduce the universe of ETFs to the funds that matter right now. And by adding mechanical, multi-factor models, thousands of securities can be screened and reduced to a small handful of relevant opportunities. These mechanical systems can drastically reduce the time and energy investors need to make effective choices.
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