They hide it well, but the financial wizards on Wall Street do not have your best interests at heart. If trading on margin can leverage potential rewards, then they give you three – and even four – times leverage to super magnify risks. And if diversifying a portfolio with a mutual fund is good, they give you mutual funds that invest in other mutual funds.
The common thread? No matter what the market does, they collect their fees. They'll recommend all types of stocks and ETFs, regardless of quality, just to collect that commission.
And that includes exchange-traded funds (ETFs) – those stock-like mini-mutual funds that are supposed to give you all of the benefits of diversification with lower cost. Yes, ETFs, which are now among the most widely traded instruments on U.S. stock exchanges.
Don't tell that to the big ETF sponsor companies that make a mint on your enthusiasm.
Here's a little secret. There are about 6,500 stocks trading on U.S. exchanges, but there were 1,756 ETFs trading here in 2017, according to FactSet. That's about 3.7 stocks for each ETF.
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But just over half of the money dumped in by unwitting investors went to just 20 of them. Talk about a crowded trade. And worse, it only seems as if you are diversified when you own them.
What happens when everyone wants to sell? The exit doors cannot be wide enough to allow for a smooth retreat, so big drops are almost guaranteed in turbulent times. Just ask anyone who owned ETFs during the "Flash Crash" of May 2010.
If things don't implode, you are left with an investment that could, maybe, possibly give you a 10% or 15% return over the next decade. Maybe that's why everyone thinks they can beat the market. The bar seems pretty low.
But with 6,500 stock here and 25,000 worldwide, where do you begin to look for the real winners out there?
You need some way to sift through the junk to find the gems.