An old school complaint pertaining to exchange traded funds, specifically the equity-based variety, is that ETFs are unlikely to outperform the best-performing stock in their respective lineups over a year or longer holding periods.
Naysayers responsible for proliferating that criticism often if not always forgot to mention that the ETF in question was also likely to outperform the worst-performing members of its lineup, but that may be a story for another day.
The Appeal Of Sector ETFs
Data suggest that employing sector ETFs, such as the Health Care SPDR (ETF)
It's Still Incredibly Difficult To Stock Pick
Even if a stock picker is able to successfully pick the right sector at the right time, the odds are still stacked against him or her. In a note out Tuesday, State Street Global Advisors (SSgA), the company behind the SPDR ETFs, looked how many S&P 500 stocks outperformed or underperformed their sector averages by at least 10 percent in a given year from 2006 through 2015.
The best year in terms of underperformance, meaning the year in which there was the smallest number of S&P 500 stocks lagging their sector benchmarks by 10 percent or more, was 2007 when 53.5 percent of the S&P 500 committed that offense,
XLV, the largest healthcare ETF, and the healthcare sector itself illustrate the difficulty in successfully picking individual winners.
“The top 10 percent of health care stocks, on average, outperformed the bottom 10 percent by 100 percent every year over the past 20 years. This wide dispersion of winners and losers helps illustrate the challenge of picking the best performing health care stocks and the implications of choosing the worst ones,” said State Street Vice President David Mazza in the note.
“But in the past five years, Mylan's volatility was two and half times that of the health care sector, and it had a downside capture ratio of 116 percent, meaning it lost more than the benchmark,” added Mazza.
Yes, there will be times, particularly during bull markets, when some stocks easily top the sector ETFs of which they are members. During its most halcyon days, Apple Inc.
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