Even More Fun With ETFs and Indices

What prompted me to revisit this topic this is that once again my inbox is being bombarded with stuff about the magic of ETFs – it seems the gloss has completely gone from cryptos so we are back to old standard. The problem with most of these genius ideas is that they lack depth – this lack of depth I think is brought about by a simple lack of experience combined with an inability to look below the surface. The basic thrust of all these ideas is that all you need to do is to buy an ETF because fund managers are shit and I agree fund managers are the most overcompensated incompetents we have outside of parliament. However this doesn’t naturally mean that ETFs which out perform fund managers are the best thing since sliced bread. They serve a purpose but the question is are they the best approach for single vehicle investors.

When I was at school we had to study Australian history and during numerous enforced trips to Sovereign Hill, which is probably the saddest tourist attraction in the world outside of the now defunct Wobbies World (Victorians will know what I am talking about) I learned two things. Firstly, Bendigo the centre of the gold rush was at one point in history the third richest city in the world. It is now the ice capital of rural Victoria, its glory days are a hundred years behind it. The habit of Australia shipping its wealth off shore is well established in our history. Secondly, the people who made the most out of the gold rush were not the miners but the clever clogs who sold things to the miners.

This brings me to the two charts below. The first is the value of $1 invested in NDAQ which is the listed group that owns the NASDAQ exchange versus QQQ which is an ETF that covers the NASDAQ 100. However, it has a twist in that it only invests in the non financial components of this index as such it has a skew towards tech based stocks. The second chart looks at the same comparison between ASX the listed group that owns the Australian Stock Exchange and STW the ETF that covers the S&P/ASX200 index.

As you can see the differential between NDAQ and QQQ is not that great. However, the differential of late has expanded with NDAQ moving ahead. The situation is slightly different with regards to ASX versus STW. Owning the exchange is a far better bet that owning the ETF that covers the major part of the exchange. Remember it is better to sell things to people who want to mine for gold than to mine for gold yourself and this is what you are seeing in the differential between the ASX and STW. If the investment question of the day was what would you rather own the index or the company that owns the index I think I might opt for the company that owns the index.