If Investing in ETFs in Bear Market, Go Low Turnover ETFs

By MariaCartas (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h25m / day (73 day average)

I’m talking about ETFs that follow Market Cap Indexes like the S&P 500 or the US Total Stock Market.

The last thing you want to do during a correction or bear market is to lock in the paper losses and make them permanent ones. The best thing to do is hang onto the stocks (if they are worthy to be held of course) until they resume to fair value.

And unfortunately, most ETFs I’ve come across (SCHD, NOBL, MOAT, GURU, PKW, CSD) all have double to triple digit turnover rates, which means the ETF is constantly locking in losses permanently.

Which makes a Market Cap Index ETF like VOO with 3% annual turnover very attractive. Market Cap Indexes by default have very little re-balancing to do as the constituent’s weighting changes is almost equal to the stock price changes in real life if the ETF actually replicates and holds the shares based on the Index weighting.

Of course, if you can find a ETF with similar or even lower turnover rate but with an investment philosophy that makes sense, then it makes perfect sense to invest in that during a correction or bear market.

And of course, this is dependent on if you want to invest in ETFs or not.

If you have the capital to build a diversified (or if you’re very sure, concentrated) portfolio of individual stocks worthy to be held for long periods of time (at least until the bear market ends), then that makes even more sense as it strips away the losses caused by turnover and annual fees paid to the ETFs.

But if you don’t have the capital to build a portfolio of individual stocks? Stick to low turnover ETFs.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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