IN THIS CHAPTER

Expecting slower growth of the ETF market

Anticipating more ETF products

Considering the economy

I try not to watch any of the investment shows on television. Stock “Expert” Number One gives their prediction of the future. Then “Expert” Number Two gives their (often contradictory) opinion. Viewers may be amused by the heated debate but never know what to do in the end.

I also usually try not to make predictions about the future, but I’ll ask you to please indulge me now. I can’t resist. It just seems like sooo much fun!

Here are my predictions, for whatever they are worth, about the world of ETFs.

ETF Assets Will Continue to Grow…for Better or Worse

Most people should be investing most of their money in index mutual funds or ETFs, and that has been happening. The initial popularity of ETFs was due largely to the interest of educated institutional investors and savvy individual investors, like you, who loved ETFs for their low-cost indexing and diversification power.

In the past few years, educated and savvy investors have continued to invest in ETFs, but there has also been a huge inflow of money from investors who have little if any idea of what they’re getting into. Much of this recent inflow is going into the leveraged and inverse leveraged and other pricey and complex and largely pointless, if not outright dangerous, ETFs. I warn you about these products throughout this book.

The vast majority of investors will never, never give up their belief that they can garner huge returns without huge risk. They’ll try any which way they can. They will attend expensive workshops that promise to teach them how to double their money overnight. They will subscribe to websites and newsletters and YouTube channels that tell them which stocks or mutual funds to buy this week for sure-fire rapid appreciation. They will buy high-priced mutual funds and will actually pay a fat commission for the honor of doing so. They will hire Bernie Madoff types who make promises that they can’t hope to fulfill. And they will buy these newfangled ETFs that they don’t understand and that will only wind up hurting them.

That’s their problem, not yours. For the intelligent investor like you, there will always be sensible, low-cost, well-diversified ETFs from which you can construct a sensible portfolio.

More Players May Enter the Field, but Only a Few

BlackRock (iShares), State Street, and Vanguard got the jump on ETFs, with others, like Invesco and Schwab, riding close behind. Other investment houses, large and small, have joined in the fun in the past few years. Unlike the world of mutual funds, however, the profit margin on ETFs is fairly thin, and has recently gotten even thinner, so I don’t think you’ll see hundreds of issuers of ETFs, as you do mutual funds.

The latest entrants, such as BNY Mellon Bank, have only been able to muscle in with extremely low prices. Mellon is, in fact, offering two ETFs for free.

This kind of competition has been great for investors! But it doesn’t give the little guy much of an opportunity to enter the field.

Investors Will Get Suckered into Buying Packaged Products

Alas, even good ETFs can be turned into bad financial products. It’s happening with some of the ETF offerings in 401(k) plans. In that case, perfectly good ETFs are packaged in such a way that the investor (trapped like a fly in a bowl of milk in their company’s plan) is paying as much as 2 percent in management fees. Good ETFs have similarly popped up in awful annuity plans, 529 college plans, and other investments where someone somewhere stands to make a big buck off the small investor. Several years back, PowerShares (now part of Invesco) tried to slap loads on ETFs. It didn’t work. Someone may try again. Remember Dr. Malcolm’s line in Jurassic Park? “If there is one thing the history of evolution has taught us, it’s that life will not be contained. Life breaks free, expands to new territory, and crashes through barriers, painfully, maybe even dangerously.” The same can be said of greed.

One of the latest fads in ETFs is the rise of so-called “buffer” or “defined outcome” ETFs. They are among the most complex and priciest of ETFs, similar to (but not nearly as bad as) old-fashioned variable annuities. Read about them in Chapter 20.

ETF Investors Will Have No Need for Anything but ETFs

Despite all the questionable recent offerings in the ETF world, some of the newer ETFs have been quite pleasant surprises, and I discuss those in every chapter of this book. I’m looking forward to seeing more offerings in the tax-free municipal bond area, where currently, only New Yorkers, Californians, and Minnesotans can buy state-specific muni ETFs.

And I’m very happy that Dimensional, which has long offered a really smart approach to index investing with its “smart beta” funds, has been converting its mutual funds into ETFs. Other mutual-fund providers are following suit.

In Chapter 25, I talk about non-ETFs that you might want to use to round out an ETF portfolio and to plug a few “holes” that might appear if you’re building a portfolio out of ETFs. I suspect that the next edition of this book will have no Chapter 25!

The Markets Will (Unfortunately) See Greater Correlation than in the Past

As the world continues to become a smaller place, and the economies of nations become yet more interdependent, so too will stock and bond markets around the world tend to move up and down in unison. This is not a good thing for investors because it lessens the power of diversification to moderate risk.

I want to emphasize, however, that diversification is not dead! Although world markets in 2008 (and very briefly in 2020) were distressingly correlated (in other words, they took a collective swan dive), some markets recovered much faster than others. And the next market swoon may not see such correlation; we simply don’t know. But I think it is fairly safe to say that investors will find a growing need to tap into new ways to diversify a portfolio. An expanded menu of ETFs will make it that much easier for anyone to implement such a strategy.

Asset Class Returns Will Revert toward Their Historic Means

Astronomical rises in the valuations of a handful of companies such as Amazon and Tesla may continue for a while, but not forever. You can also expect an end to the astonishing rise in the price of U.S. housing. And although U.S. stocks have outperformed foreign stocks for the past several years, that will reverse at some point. Asset class returns tend to revert to their historical norms.

One study from Duke University found evidence to suggest that with an ounce of gold in ancient Rome, you might’ve been able to purchase a basket of goods roughly similar to what you could buy in today’s Rome for an ounce of gold. In other words, gold may have just kept up with inflation for the past 2000 years — no better, no worse. You may occasionally see double-digit returns, but that’s an anomaly. Anomalies are, by definition, temporary.

In terms of an ETF portfolio, this may be a good time to slightly underweight U.S. large-cap growth, which has far exceeded its historical returns over the past several years. (Tilt your portfolio oh-so-slightly because these are only one man’s predictions! Moreover, by the time this book appears in print, new information may have caused me to revise these predictions.)

Taxes Will Rise

Let’s see…the United States has a raging federal deficit; public and private debt that’s arguably out of control; an aging population; a medical “system” (if you can even call it that) that has left millions unable to pay their doctor, dentist, and hospital bills; a challenged Social Security system; and a seriously troubled public school system. After huge tax cuts (mostly for the very wealthy), these problems persist and worsen. Sooner or later, something has to give.

I’m hearing the same platitudes that I’ve heard for decades: “We’ll cut waste and government will become more efficient.” Yeah, right.

I believe that future administrations will have no option but to raise taxes. I would hope that they will start with the super wealthy, who have saved a bundle in tax breaks over the past years. But who knows? Tax rates may be raised across the board. I advocate squirreling away as much of your ETF portfolio as you can into a tax-free Roth IRA.

Inflation Will Remain Tame

Although I’m certainly concerned about inflation and recognize that it can devastate a paycheck or a portfolio, I’m not too worried about a return to the double-digit inflation of the 1980s. There is a good reason that we saw double-digit inflation back then: The United States decided to abandon the gold standard in the 1970s, and the new monetary system was walking on its baby legs.

Today, we have forces at play that argue for greater inflation (such as the national debt), and we also have forces at play working in the other direction (such as fairly stagnant wages for most workers). But the monetary system isn’t walking on baby legs. I anticipate that inflation in the next decade or two will be higher than it has been in the past decade, but similar to what it was prior to that: somewhere in the ballpark of 3 percent.

Whether I’m right about the 3 percent, or whether inflation runs higher, you can protect yourself with a good helping of stock ETFs (stocks have a very good track record of keeping up with inflation) and a position in an ETF that tracks an index of U.S. Treasury Inflation-Protected Securities (see Chapter 14).

Private Pensions (of Sorts) May Emerge from the Rubble

There’s one kind of risk against which all the good saving and wise investing in the world can only go so far to protect you. That is “longevity risk.” In order to live a life of comfort post-retirement, you need to save and invest as if you could live to be 105…because you just may. But, in point of fact, you probably won’t live nearly that long. Wouldn’t it be nice if we could all save just enough to get us through to the average life expectancy (mid 80s), and the money from those who die sooner could help support those who live longer? That’s the basic idea behind Social Security, which I’d like to see strengthened, not weakened. Alas, politics being politics, that seems unlikely.

But I have hope that even if the government doesn’t come through, private industry may offer us even better “old age insurance” in the form of reasonably priced annuities instead of the horribly overpriced, confusing, restrictive, inflexible, locked-in, complicated, and tricky annuities that have come to dominate the insurance market. Certain companies, such as Vanguard and Fidelity, have taken positive strides in this direction. But I’d like to see the day — and we may get there yet — when annuities, just like most ETFs, become simple, transparent, inexpensive, and sensible. Perhaps ETFs themselves may evolve into such instruments.

Hype Will Prevail!

Of all my predictions, this is the one I’d put money on.

You’ll be seeing more websites, blogs, television clips, and advertisements with headings and leads such as “Build Instant Wealth and Retire Early with ETFs!” And there will be books with titles such as Beat the Market with ETFs! and You Can Make a Killing in ETFs! One of them may become a bestseller, which means that it will make a lot of money for someone — but not for the people who read it.

Bull markets are followed by bear markets, which are followed by bull markets. Trading floors are replaced by electronic trading platforms. Mutual funds are challenged by ETFs. The world of investing keeps changing, morphing into something hardly recognizable from the days when just about all investors were men who wore funny hats, smoked cigars, and spent hours reading tickertapes.

But one thing remains constant: The financial industry will continue to produce hype in the hope that you will buy their new products, and sell, and buy, and sell, and buy, regardless of how ridiculously complex and expensive whatever products they are pushing happen to be.

Having read this book, you now know better. Put your knowledge to good use. Build a diversified portfolio of low-cost, transparent, tax-efficient ETFs. Keep an eye on your nest egg, but don’t make changes very often. Just be sure to rebalance at regular intervals. Sit back and relax. Let the hype pass over you like a summer breeze.