INVESTORS WITH DIAMOND HANDS ARE FOREVER

The Don Black song: Diamonds Are Forever sang by Shirley Bassey came to my mind when I heard of investors with “diamond hands.” In the world of cyber speak an investor with “diamond hands” is defined as:

“One who holds a stock adamantly, despite the ups and downs of market price until their investment becomes valuable… like a diamond.”

What does an “adamant” investor mean by “valuable”? One can certainly put a price on something and “adamantly” maintain they won’t sell until the market bids that price, but how long do they wait? Will that adamant investor hold forever? Is there something you can hold forever? Perhaps you can hold Dow “diamonds” forever. Those being the ETF shares of the SPDR Dow Jones Industrial Average, shortened to Dow Industrial Average or ticker DIA. These shares emulate the 30 industrial stocks that make up its name’s sake. It has the nifty feature that it pays a monthly dividend. The index weighs an equal number of shares for each stock, unlike the S&P 500 which is weighted by total market value of a stock (total outstanding shares multiplied by their price). For example, UnitedHealth Group (ticker: UNH) with a price over $400/share makes up 8% of the DIA index verses Apple (ticker: AAPL), a much larger company both in value and economic effect, with a price of just over $140/share at 3% of the index. This is largely because the Dow Industrial Average was created in 1884. Back then stocks were expected to trade at or about par. Par in most cases was $100/share. Par was a value below which the offering company could not buy it back. Since most stocks of that day were offered or traded at or around par the size of a company was less important in gauging how a typical portfolio performed. Time, taxes, brokerage fees, and securities laws have changed over the years and stocks are no longer expected to trade around par. Most newly issued shares today are offered with no par value or with one that is a penny or less. While the performance of the price weighted Dow Industrial Average has lagged the market cap weighted S&P 500 slightly over the years, it still reflects the performance of what a typical portfolio of individually acquired stocks looks like. If you like holding a portfolio that pays you every month you might adamantly hold the DIA ETF “diamonds” forever.

Speaking of holding forever, I have been holding the Vanguard Emerging Market ETF (Ticker: VWO) in my model portfolio for nearly 15 years, and that feels like forever. The emerging markets were performance darlings in the 1990 and early 2000’s but since the financial disaster the Asian market component has underperformed. This fund did add volatility and thus better performance to a re-balance portfolio over the years despite it’s lagging “hold only” performance. Buying some low and selling some high around a fixed relative position generated income which has added ~1.0% per year to the performance contribution. Some 2 to 3 years ago, however, I started to question Vanguard’s market weighting philosophy about this fund. If one must buy low and sell high, some volatility and growth is required. Since the Asian emerging markets have an aggregate value much larger then nearly all the other emerging markets combined Vanguard makes the Asian markets the index bogey. The VWO is 60% directly invested in Asian businesses and over 50% in Chinese related companies.

Diversification is the only free lunch in the market, and VWO no longer looks or performs like a truly diversified emerging market fund. With that in mind I have been searching for a replacement. There are now over 70 ETF funds identified in the Morningstar database as emerging market, but when one limits the amount of exposure to Asia to no more than 50% and looks for five or more years of performance that is as good or better than the VWO the list winnows down to a handful. Of those only two made the cut: the SPDR S&P Emerging Market Small Cap ETF (ticker: EWX) and the First Trust Emerging Markets Small Cap AlphaDEX ETF (Ticker: FEMS). One of the funds that got cut, because it does not have a 5-year track record just yet, bears mentioning, and that is the iShares ESG Aware MSCI Emerging Market ETF (ticker: ESGE). I expect good things from the ESGE and EWX, because their low fees and star ratings give them the edge for a buy and hold only strategy. However, a regularly rebalanced portfolio needs a volatility component and because of its rules-based approach and relatively high beta (a measure of volatility) the FEMS ETF was the over-all winner. More importantly I expect Morningstar to raise its star rating over the longer term adding a performance boost to those who BUY! this fund now. For those of you who are invested in the VWO and want more regionally diverse emerging market performance, on a going forward basis I suggest dollar cost averaging out of the VWO over four quarters and into one of the above mentioned funds.

*The percentages reported are year to date - September 30, 2021. The TWI 60/30/10 ETF PORTFOLIO is my custom 60 % stock / 30% bond / and 10% cash blend of Vanguard indexed based ETF's. The SPY is the S&P 500 trust ETF. The BND is Vanguards Total Bonds Market ETF.

Invest Wisely!