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The Motley Fool Has An ETF!

A look at the pros and cons from The Motley Fool's new ETF.

The Motley Fool, long time provider of stock market content, launched an index based ETF, the Motley Fool 100 Index ETF (TFMC) that market cap weights individual stocks that primarily are favorably viewed by its cadre of writers. As a quick note, I wrote for The Motley Fool back in 2004, it was a short gig. ETF.com has more details about the particulars of the fund including sector weightings which don't appear to yet be on the fund's web page.

ETF.com reports a 44.8% weighting in technology followed by 17.5% in financials. Amusingly, the recently launched blockchain ETFs are also dominated by those two sectors, more so actually.

The fund is very top heavy. It has almost 49% in its top ten holdings. Apple (AAPL) is the largest holding at 8.15% and Alphabet (GOOG) weighs in at 7.51%. The back test is of course astounding, otherwise there would be no fund; "204.76% since inception (data goes back to 2007) relative to a 138.4% return for the S&P 500 during the same time period."

This is an example where it is crucial to look under the hood of a fund. So much in one sector makes it vulnerable to a decline in what has been the hottest area of the market and if combined with other funds that are heavy in tech, that would make the portfolio very likely to drop more than the broad market when the next bear phase comes along.

This does not invalidate fund, all strategies are vulnerable to something, or a few things and this one is vulnerable to a down draft in tech and I would also imagine that fund might also be a momentum proxy. There's a fair bit of holdings overlap with the iShares Edge MSCI US Momentum Factor ETF (MTUM) and the Fidelity Momentum Factor ETF (FDMO).

On the assumption someone interested in TFMC is not looking to be grossly overweight the tech sector for their entire portfolio they should consider pairing it with a fund with little to no tech exposure or combining it with multiple funds with little to no tech exposure. The Powershares S&P 500 Low Volatility Portfolio (SPLV) has about 9% in tech, the SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV) has about 12% in tech as a couple of examples but the Fidelity Low Volatility Factor ETF (FDLO) has 20% in tech. SPLV and LGLV will have their own risk factors too. It's important to understand that the access with ETFs is easy but there is plenty of work to do.