Horizon Kinetics’ contrarian research report compendium.
The topic of this section is the representation of various companies in a range of ETFs. Let’s start with Exxon Mobil Corporation (NYSE:XOM), the largest company in the S&P 500. It may interest some readers to know that XOM is represented in 86 different ETFs and, of course, their underlying indices. Some are quite obvious, like the S&P 500, the Large Cap ETF, the Russell 1000, the Russell 3000, the S&P 100, the Dow Jones Industrial Average, the Low P/E Fund and the S&P 500 Value Fund. However, it may also interest readers to know that Exxon is also represented in the following ETFs: Large Cap Growth, the Russell Top 200 Growth, the Consistent Growth, the Aggressive Growth, the Russell 1000 Growth, the Growth at a Reasonable Price, the Russell 1000 Value, the Russell 3000 Growth, the Russell 3000 Value—in itself it is quite an accomplishment to be in both the Growth and Value ETFs—the S&P 500 Growth Index, the Russell 1000 High Beta Index, the Russell 1000 High Momentum Index and others. Certain companies appear in various indices whose structural orientation, in principle, should be mutually exclusive to one another.
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
Apple (AAPL) is another example of such a company. It is represented in 82 ETFs. Some are quite obvious like the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), the S&P 500 (INDEXSP:.INX), the Technology Select SPDR, the Russell 1000 High Beta, the Russell 1000 Low Volatility, the Russell 1000 High Momentum and the Russell 1000 High Volatility. It’s quite an accomplishment to simultaneously be in both the low volatility and the high volatility ETF. Nevertheless, it’s a fact. Apple Inc. (NASDAQ:AAPL) also happens to be in the S&P 500 Pure Growth, the S&P 500 Growth Index and the Russell 1000 Growth Index.
There are ETFs with a very narrow focus as their objective and it’s amazing how the decision criteria repeatedly lead one to large cap liquid companies. For example, there exists an ETF known as the Ocean TOMO Patent ETF (OTP) and its purpose is to find companies in which to invest that hold patents. The S&P 500, in contradistinction, is merely a selection of stocks meant to be representative of what’s available for investment in the entire stock market. The top ten companies in the S&P 500 Index are: Exxon Mobil Corporation (NYSE:XOM, Apple Inc. (NASDAQ:AAPL), International Business Machines Corp. (NYSE:IBM), Chevron Corporation (NYSE:CVX), Microsoft Corporation (NASDAQ:MSFT), General Electric Company (NYSE:GE), Johnson & Johnson (NYSE:JNJ), The Procter & Gamble Company (NYSE:PG), AT&T Inc. (NYSE:T) and The Coca-Cola Company (NYSE:KO). The top ten investments in the Ocean TOMO Patent ETF are Microsoft, Royal Dutch Petroleum, IBM, GE, AT&T, Oracle Corporation (NYSE:ORCL), Pfizer Inc. (NYSE:PFE), Intel Corporation (NASDAQ:INTC), Toyota Motor Corp (ADR) (NYSE:TM), and GlaxoSmithKline plc (ADR) (NYSE:GSK) (LON:GSK). The Ocean Tomo Patent Index is not radically different from the S&P 500, nor is its performance.
According to my own count, in the energy space there are 59 ETFs, in the commodity space there are 157 ETFs, in the large cap space there are 249 ETFs. Since for all intents and purposes the S&P 500 represents the benchmark for large cap investing, one might wonder why we would need more than one index, but apparently we do. There are 110 Small Cap ETFs, 127 Large Cap Blend ETFs, 238 Blend ETFs in general, 52 Emerging Market ETFs, 616 American Stock Only ETFs, 49 Treasury ETFs, and 396 Sector ETFs, which in itself is interesting inasmuch as there are only 10 sectors in the S&P 500.
There are at least a trillion dollars in ETFs and there are clearly many trillion dollars more that are indexed in general without entering the ETF space. Indexation represents the most prevalent equity investment strategy and, therefore, it is the biggest business in investing. To orchestrate those investments requires exceedingly liquid large capitalization stocks. The problem is that there is a limited supply both in number and in capitalization of such stocks.
Horizon Kinetics: The ETF Paradox
In the modern day, companies trade in relation to their identifiable characteristics. If a company is in financial services and it’s in a Financial Services ETF, it will trade like the other companies, irrespective of whether or not it has those characteristics. In philosophy there is a situation known as the Idler’s paradox, which deals with an imaginary university student who has been studied and whose grades have been predicted by the academic staff. He has been admitted to a very good university and the admissions department has decided that throughout his university career, this student will have certain grades.
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Via Horizon Kinetics