An ETF idea…

Not that anyone asked, but I have an idea for an ETF.

I

ETFs, or Exchange Traded Funds, are a method for investing. ETFs are collections of stocks, bonds or other assets. They’re similar to mutual funds, the main differences being:

(1) ETFs trade all day, minute by minute, while mutual funds trade once at the end of the business day;

(2) ETFs are more tax efficient, when investing in a taxable brokerage account;

(3) ETFs are portable across brokerage accounts. In an account at Fidelity, for example, you can only hold mutual funds from Fidelity or partnered companies unless you want to pay an additional fee. With ETFs, your Fidelity account could hold ETFs from Fidelity, Vanguard, Schwab, iShares, etc.

II

In the book Antifragile (2012) Nassim Nicholas Taleb talks about the “Lindy Effect,” which he summarizes as “the old outlives the new in proportion to its age”. With technology or concepts, older things will tend to endure longer than newer things. The older things are time-tested and have proven their utility across generations, and thus are more likely to endure relative to newer and untested things. He uses the example of kitchen implements, noting with an illustration how they’ve changed very little from ancient Pompeii to the present:

III

This observation sparked an idea for me: are older companies more likely to endure relative to newer companies and have better investing results? I wrote here about how boring stocks are more likely to perform better over the long term, which seems to give provisional support to this idea.

I finally decided to test the idea, in a way, on Portfolio Visualizer. But they changed the website since the last time I used it, and I can only test 10 year periods rather than back to the 1970s so … yeah, disappointing. But it’s a start.

I found a list of the oldest companies listed on the New York Stock Exchange, and selected 10 of the oldest:

Bank of New York Mellon and Cigna go back to the late 1700s and the others all date to the 1800s. Old, established, boring companies. Let’s call this hypothetical ETF by the name OLD.

I created a portfolio of 10% each of these stocks, compared it with the S&P 500 and with VTMSX a Vanguard total US market fund. You can see the full results here. Ideally, the stocks would be “weighted” so the oldest companies would be held in larger proportion, and it would have more than 10 stocks including international stocks that aren’t listed on the NYSE. But I can’t figure out how to do that and I want to keep it relatively simple for now. So we’re stuck with the 10% each portfolio for this example.

Starting with $10,000 invested in January 2015 through May 2024, my OLD portfolio had a total return of $21,066, compared to $28,597 for the total market fund and $30,110 for the S&P 500. Portfolio 1 is the total market fund, Portfolio 2 is OLD, and Portfolio 3 is the S&P 500.

Why would you possibly invest in OLD if it had less total return? Here’s why you might consider it: OLD is more stable. Look at the results for 2015, 2018 and 2022.

OLD would under-perform when the overall US stock market is roaring. But when the overall market is disappointing, OLD often performs better or at least not dramatically worse.

In 2018, OLD had a return of 5.2%, while Portfolio 1 had a 0.29% and Portfolio 3 had a return of 1.25%

In 2018, 1 was down 5.26%, OLD was down 5.87% and 3 was down 4.52%

In 2022, 1 was down 19.6%, OLD was up 3.62%, and 3 was down 18.2%

The “max drawdown”, or worst drop of any type from top to bottom, was 18.1% for OLD, compared with 24.9% for Portfolio 1 and 23.9% for Portfolio 3.

The worst single-year return for OLD was minus 5.8%, compared with minus 19.6% for Portfolio 1 and minus 18.3% for Portfolio 3.

IV

I’d love to test this portfolio through the Dot-Com crash of 2000-2002, when the S&P 500 was in the red three years in a row, or test it through the bear market of the 1970s. But I can’t do that anymore (thanks Portfolio Visualizer!). But you get the idea. And I think this type of portfolio would be good for conservative investors, or for part of the portfolio.

Professor Jeremy Siegel did some research on the stocks that were in the original S&P 500 from its creation in 1957. He found the best performing stocks over the long-term were usually boring as hell: Phillip Morris, Proctor & Gamble, PepsiCo, etc.

I believe many younger investors, who’ve never experienced a prolonged bear market, are over-estimating their risk tolerance. All the market drops in their adult lives have seen very quick recoveries. They’re not prepared for two or three years deep in the red, with a 5-10 year period to break even.

It might be good to contemplate leaning some of the portfolio towards boring, more stable companies rather than chasing Artificial Intelligence hype.