The World Of Funds And Why U.S. Is Most Attractive

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Dan Malone of Malone Financial talks to us about the world of funds and how he approaches international and U.S. ETFs (0:25). Low conviction on Irish, emerging market funds (3:25). This is an excerpt from a recent Investing Experts conversation.

Transcript

Rena Sherbill: Dan Malone, welcome to Seeking Alpha. Welcome to the podcast. It’s really great to have you. Thanks for making the time.

Dan Malone: Thanks for having me.

RS: So talk to us a little bit about the funds, about the world of funds. The ETFs are something that have really exploded in recent years, and they make up so much of the market these days. Talk to us about your approach with funds and how you encourage investors to think about them.

DM: In terms of the funds themselves and what I talk about on my channel, it’s typically broken up into four sections. You have what I like to call your more broken up approach, which I generally look at three funds, an S&P 500 Fund, a Europe Fund, and an Emerging Markets Fund.

And one strategy that I see many people deploy, including myself, is that you effectively pick three competitive funds in each of those categories. So, S&P 500, one Europe, one emerging markets. And you effectively allocate your monthly or your quarterly or your yearly investment across those funds based on whatever investment strategy you want to achieve and whatever your risk appetite is.

So you could do something like, 70% to the S&P 500 (SPY) (SP500), 20% to Europe (IEV) (VGK), and 10% for emerging markets (EEM) (VWO).

Now the question that I always get is, oh, why wouldn’t you just go with an all-world ETF, a single all-world ETF (ACWI), and then you have all those regions in one single investment?

Well, the reason why you might want to break it up into three different funds as opposed to just owning one single all-world ETF is because you have little control over the weightings of the different regions within the all-world ETF.

And what you’ll find is that most All-World ETFs (VT) are heavily weighted towards the U.S. So if you were someone who wanted to have quite a heavy weighting towards Europe, you want to put maybe 50% of your investment towards European funds, you can do that by owning each of the regions as individual funds.

So you could do 50% of your investment amount to Europe. You could do 30% for Emerging Markets, and 20% to S&P 500.

I find that for people who want to have more flexibility in terms of where their cash is being allocated at a given point in time, owning the component funds separately can oftentimes be more attractive than simply owning one single all-world ETF. But from a simplicity perspective, owning the single fund is obviously a no-brainer.

In terms of a strategy, that’s generally what I like to cover, but one thing that I tend to do on a yearly basis is I’ll do an analysis of all European ETFs, let’s say, at year-end, and I’ll effectively assess which are the most competitive funds for that given year because what we have here in Europe at the moment is a situation where all of the asset managers are effectively competing with each other for business, which is great for the end consumer because we’re getting ETFs that have net lower total expense ratios.

That fee just keeps getting lower and lower, which is obviously great for the end result.

It’s not a case of essentially picking one fund for life necessarily because you never know this time next year, there could be a fund that will provide you with identical exposure to whatever assets you’re looking for, but they might do so at a more competitive price.

RS: Are you a fan of the Ireland ETF (NYSEARCA:EIRL)? Is that something that you’re invested in? And what are your thoughts on the country level?

DM: It’s interesting. Ireland, Irish companies and the Irish stock market index, as a whole, I believe you can get ETFs that track the ISEQs of the Irish stock exchange, but it’s not necessarily something that I would personally invest in.

Not that I don’t believe in Irish companies. I just don’t think there’s enough companies included within that index to offer sufficient diversification over the long term.

And so at a country level, something like the S&P 500 (SPY), which obviously covers the United States, is infinitely more attractive to me than an Irish index.

Now that being said, if you look at the likes of Irish banking stocks, anyone who invested in Irish banking stocks during COVID in 2020 when those stocks took a real beating, you’re up maybe 300%, 400%, 500% today.

So there are some really great opportunities in the Irish market as a whole, but in terms of long-term investing, something like the U.S. is going to be a lot more attractive to me.

In terms of my own perspective of the countries, and what strategy is best for me, I personally my own investment portfolio is weighted more towards the U.S. and the S&P 500. And that’s simply because I just, I believe in North American companies and what that market is doing more than, say, emerging markets.

I wouldn’t have as much conviction in terms of, I suppose, security and reliability in the emerging markets as I would in the U.S. And, likewise, in Europe, there’s some really cool stuff happening, and that market is certainly catching up in terms of the companies that are within those indexes. But for me, the U.S. is certainly the more attractive of the three.