Horizon Kinetics third quarter commentary: No one can accuse us, in these pages, of not being diligent in using our words, though we have been accused at times of using too many. So this review switches modalities somewhat, with more exhibits and fewer words. What won’t switch are the themes, which are as relevant as ever: 1) the important and dysfunctional ways in which indexation is affecting security valuations, risk, and returns; and 2) the antithesis of indexation—active management and individual security selection, of which we, certainly, are practitioners.
Horizon Kinetics: indexation in the modern (post 2008/2009 Credit Crisis) era:
Prices in the marketplace are made by the marginal, or last, buyers or sellers—it’s not the 99%+ of Apple Inc. (NASDAQ:AAPL)’s shareholders who determine its price, but the net buying or selling pressure of the fractional percent who are transacting on a given day. It’s certainly not us: we’ve been accused of harboring really long-term holding periods—years and even decades. Granted, we inhabit one end of the spectrum. So, here are some recognizable benchmarks: the annual turnover rate for IBM (the proportion of its outstanding shares traded each year) is about 83%; the figure for Exxon Mobil Corporation (NYSE:XOM) is 68%. The average mutual fund has 68% annual turnover.
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Now, for two of the most popular exchange-traded funds (ETFs), the large-company SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), which is supposed to provide exposure to small company stocks, their annualized turnover, respectively, is 3,309% and 3,340%! Yes, I said 3,340%! The average holding period is measured in days.
In relying on an index or ETF description, investors no longer bother (or believe they need) to evaluate the stocks they own, if they happen to be owned through that index. This both creates, and is blind to, some remarkable, suitable-for-cocktail-party-story imbalances. Let’s just say one wished to have some exposure to Spain. Perhaps the intent is to profit from excessive fears of its economic demise. One chooses to participate via an ETF like the iShares MSCI Spain Capped ETF (NYSEARCA:EWP).