Mr. Steven M. Bregman, Co-Founder, President, Senior Portfolio Manager and Board Member of Horizon Kinetics LLC, recently sat down with Real Vision TV to discuss what he believes to be the very dangerous illusion of diversification that ETFs and passive investing have created in today’s markets.
Mr. Bregman notes:
“If you look at… the iShare Spain ETF. Let’s say you didn’t know much about stocks but you read and you think ‘I think Spain has been oversold.’ It had it’s crises. It was a deep crisis but they have recovered and the market hasn’t come back and it has its dynamic spots in the economy, I’d like to buy some. All I want is exposure to Spain. Diversified exposure. So you buy this Spain ETF, and first of all, nobody tells you that the top 10 companies account for 70% of the weight. It’s not diversified number one. So now you are actually buying individual stock risk. Okay, I am willing to live with that, but nobody told you that six of the top ten holdings get 74% of their revenues from outside of Spain. So buy Spain, your investing outside of Spain, cause these are multinational corporations.”
“You are exposed to risks everywhere, whether its REITs, or Spain, or Emerging Market Bonds, Emerging Market stocks, or large cap growth or small cap growth that are not what you are being told they are. They are really being driven by liquidity, meaning buying pressure for certain kinds of stocks, and low interest rates, and on your pie chart you might look semantically diversified, and your not diversified whatsoever. You are really exposed to one great big interest rate play. And fortunately the response to that is to recognize that, we will call it the ETF divide, most of the world now looks at through the lens of indexation. Stocks fit into this vortex or they don’t. They can be excluded for reasons that have very little to do with how the business is doing.”
Enjoy the interview below: