Tag Archives: seeking

WisdomTree just introduced a new exchange traded fund. The Europe Local Recovery Fund sounds great, but is it? My gut tells me it’s another sign of an overextended ETF industry. Exchange traded funds, or ETFs, are amazing products in many ways. In fact, used properly, ETFs can be the basis for a solid portfolio. However, if you don’t pay close enough attention or make aggressive fund choices, ETFs can be very dangerous. WisdomTree’s (NASDAQ: WETF ) new Europe Local Recovery Fund (BATS: EZR ) falls into the riskier category in my book and is another sign that ETFs are, perhaps, too hot a product. The new fund EZR, WisdomTree’s new fund , is designed to, “…maximize exposure to European companies that may benefit from Europe’s economic recovery…” It goes about this by focusing on companies that generate 50% or more of their revenues from within Europe. According to the fund’s fact sheet, the portfolio gets about 70% of its revenues from this region. So an investment in EZR really does get you focused on Europe. There’s more to it than that, though. EZR’s portfolio excludes telecom, utilities, consumer staples, and health care, which aren’t as impacted by economic recoveries. Instead, it focuses on the industrial, materials, consumer discretionary, IT, finance, and energy sectors. All of which WisdomTree expects to benefit more from a regional upturn. But wait, there’s still more… EZR’s holdings: …are weighted by their correlation to the [European Commission’s Economic Sentiment Indicator]. Those whose returns show higher correlations to monthly changes in the indicator will be tilted toward higher weights-and vice versa. So the most economically sensitive stocks have the highest weight. Is EZR good, bad, or indifferent? Here’s the thing. EZR isn’t exactly a bad ETF. But it is a risky one. If Europe is doing well economically, the fund should perform well. If Europe isn’t doing well economically, EZR is likely to be a dog. Don’t overlook this simple fact. By its basic design, EZR is leveraged to Europe’s economic performance up and down. It’s not your typical European stock fund. You need to understand that very clearly when you buy it, otherwise you could be getting something you didn’t expect. If EZR is exactly what you’re looking for, great. But I consider this a pretty esoteric investment product. It’s highly focused around just one positive outcome. WisdomTree has other European funds, so I’m not sure why this one was needed. Except, perhaps, to bring out a new product so the fund sponsor could bring in more assets. Which is the first thing I thought about when I saw the news release on this ETF. Maybe there are a few highly sophisticated investors out there for which this product would make complete sense. But for most, it’s way too targeted. While WisdomTree suggests pairing it with its more broadly diversified Europe Hedged Equity Fund (NYSEARCA: HEDJ ), EZR is really meant for a trader. Someone who thinks the European economy is going to pick up. But that same investor needs to be savvy enough to sell EZR when he or she thinks the European economy is going to head south. If you aren’t that type of investor than owning EZR is far more likely to be dangerous to your financial health than helpful. Got to make a living This isn’t to suggest that WisdomTree is doing anything bad or wrong. If there’s a market for a niche product like EZR they have every right to fill it. In fact, if they want to keep growing, they pretty much have to find unique products to bring in more and more assets under management because the ETF market is pretty saturated with product at this point. And that’s what worries me. ETFs are a huge business and a relatively new one. We’ve quickly moved past the basics, like broad-based index funds, to increasingly focused and sometimes highly unique investment options. To give you a sense of where we’ve come from and where we are going, the Investment Company Institute’s data shows that there was about $45 billion of ETF issuance in 2002. That number was over $240 billion in 2014. So nearly six times as much money went into ETFs in 2014 as went in in 2002. If you are like me, you like to see new ideas for no other reason than they are interesting. They make you think about things in a different way. And to that extent, EZR is very interesting. But it’s also a product that isn’t appropriate for most investors. It’s also a product that’s taking such a specialized focus that it makes me question if ETFs have grown too far (I’ve long felt this, so it’s really just a symptom of an issue I’ve already been concerned about). It makes me think that ETFs are increasingly more about marketing than creating low-cost, freely traded, and broadly useful investment products. Which is what the goal was when ETFs were first created. The Global X Yieldco Index ETF (NASDAQ: YLCO ) is another fund I’d throw up as questionable so you don’t think I’m picking on WisdomTree. EZR is just a new fund that highlights my concern about increasingly esoteric ETFs. The sad truth is that it wouldn’t take me long to create a substantive list of ETFs that might be more dangerous than they are helpful. (Throw in most of the 2X and 3X ETFs on that score.) If you are an ETF investor you don’t have to run for the hills. But you do need to think carefully about what you own and why. Make sure you understand the ETFs in your portfolio and all of the implications you face from owning them-good and bad. My gut says that ETFs are a product where simple is better, particularly as ETFs get more and more complicated. As for EZR, most investors should avoid it.