The Big Reason Do-it-Yourself Investors Must Own ETFs

Have you heard of the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSEARCA:WSKY), an ETF that invests in publicly traded companies operating in the whiskey and spirits industry?

That’s okay if you haven’t.

Nobody can keep track of the countless myriad of ETFs trading on the TSX, let alone the thousands flogged south of the border in the U.S.

Needless to say, when WSKY hit the market in October 2016, it got a lot of press because of the nature of its focus. If you enjoy a wee dram every now and again, it’s hard not to be attracted to the ETF.

However, that doesn’t mean you should own it.

“Conceptually, I get the idea behind the fund, which invests in 23 companies around the world, most of which are manufacturers of spirits, wine, and beer,” I wrote in February 2017. “Many of the holdings are unavailable on U.S. stock exchanges. However, the top 10 holdings account for 78.9% of the portfolio, with Diageo Plc (ADR) (NYSE: DEO) in the number one position at a weighting of 24.1%.”

My argument against WSKY was that it charged too much — it has an annual management expense ratio of 0.75% — for what essentially is a bet on Diageo.

Now, I’m not shy about admitting when I’m wrong or off base about a subject, so let me just say that the ETF’s performance since its inception last October has been excellent; it’s up 13.3% through the end of May. It also lowered its management fee May 1 by 15 basis points to 0.60% — a 20% reduction.

These two points might help with the asset gathering which has only managed to bring in a little less than US$3 million in eight months.

As I said, it’s a good idea conceptually because many of the stocks held by the ETF can’t be bought on the TSX or the NYSE. However, even though it’s 20% lower, I have a problem with the fees.

And that’s where Vanguard FTSE Emerging Markets All Cap Index ETF (TSX: VEE) comes into play.

John DeGoey, a portfolio manager at Industrial Alliance Securities, appeared on the June 8th edition of BNN’s Market Call with three ETF recommendations, VEE being one of them.

“This is the single most consistently recommended ETF on my product shelf. It offers significant diversification and low-cost access to the one part of the world that is actually showing some tangible economic growth,” DeGoey said on BNN. “Risk and reward are related and I would expect any emerging market ETF to be relatively volatile. With that said, the growth prospects are compelling.”

VEE charges an MER of 0.24% annually — 60% less than WSKY. It has a total of 4,526 stocks in its portfolio, making it considerably more diversified. While it has some small- and mid-cap stocks, over 60% of the $533 million in assets are large caps.

Of WSKY’s 23 holdings, a few are companies in emerging markets, while others can only be bought over-the-counter on the Pink Sheets.

If you believe the experts who see emerging markets being the outliers regarding performance in the next few months and into 2018, unless you’ve got a connection that can get you hooked to buy stocks in some of these countries, an ETF like VEE is a must.

It’s where active management meets passive management, and it’s the wave of the future.