Why Active ETFs Are Ruining Your Returns (Exchange Traded Slop)

The TikTokification of investing is upon us, it seems, and we're now seeing the ETF equivalent of AI slop flooding the market. For the first time in history, there are not only more ETFs than individual stocks, but also more active ETFs than passive ones. And many of them being launched today are clearly being engineered to attract assets rather than improve results for investors, which means ETFs are no longer synonymous with sensible investing. And what began as a simple, low-cost way to build wealth is starting to become something very different, and ordinary investors are oblivious. I'm James Helliwell, I'm a former fund manager turned financial educator, and in this video I'm going to show you why many of these new ETFs are likely to underperform and how avoiding the wrong ones could leave you tens of thousands better off over time. And if you watch to the end, you'll know exactly what to do with your portfolio. Now, the first problem is that ETFs were supposed to simplify investing, but there's an ETF for everything now, whether it's AI, pets, cannabis, even woke and anti-woke portfolios. And the explosion of choice has created a paradox here. It's hard to tell whether you're investing in something credible or whether you're putting your life savings into a bloody TikTok meme. So rather than feeling empowered to do your own investing, you're being left feeling overwhelmed, unsure of what to buy and whether you're missing something better ultimately. And worse still, if you do take the plunge to pick one of these funds, it might not be what you think it is at all. Let me give you an example. Think of it like champagne. ETFs are just a vehicle, or in this case, the bottle. And unlike the Champagne region, there are no rules about what goes inside the bottle as long as it's liquid. So whilst the bottle might look the same on the shelf, you might well be toasting with Buckfast rather than the good stuff. Now, I speak from experience in saying that the best active managers wouldn't want to reveal the holdings and strategy publicly, at least not in real time. But that level of transparency is required by ETFs, and that compromises their edge if they had one to begin with. So by deduction, many of these actively managed ETFs are launched with failing strategies that the mutual funds behind them could no longer run and could no longer attract assets with. So in other words, active ETFs are where fund managers go to die. And considering how these now outnumber even passive ETFs, the chances are you're setting yourself up for a pretty bad investment if you don't know exactly what you're buying. And there's this Dunning-Kruger effect here too, because the more specific a strategy sounds, the more we assume we understand it. Take JP Morgan's fancily titled NASDAQ Equity Premium Income. The ticker for this is JEPQ. You can see it has a 5-star rating and a man in a very attractive branded gilet reassuring you that it's going to give us consistent premium income with lower volatility. Doesn't that sound wonderful? Well, when you begin to dig into this and what it actually delivers, it's a very different story. Here you can see the performance of that ETF, the JP Morgan ETF. Compared to the NASDAQ, the Q's, QQQ. It's underperformed. Now at the same time, according to the prospectus that we've just seen, it's meant to deliver performance with lower volatility. And this shows up in something we finance geeks like to call the Sharpe ratio. So this is the return relative to the volatility that was incurred to get that return. So a higher number is better. And you can see that in every case, The JP Morgan fund was lower than just buying QQQ, the benchmark NASDAQ ETF. So not only did it lag in terms of return, it also didn't deliver on its promise of lower volatility for that risk-adjusted performance. And when you consider the fee at 0.35%, it might not sound like a lot on its own, but it's twice as much as the obvious vanilla alternative, which doesn't include the additional platform fees that we'll look at a little bit later. So this is the paradox, because more choice isn't making things any easier for investors. And the growing complexity and these seemingly flawed strategies of these ETFs opens up a whole new set of risks. And all the while, the limited trading history that a lot of these inevitably have, having just launched, makes the underperformance harder to spot. So it seems the fund management world's back to its old ways here, but now for the bargain price of just 0.38% per year in the case of that JP Morgan ETF. And this creates another problem for investors, because even when you think you've finally found something amidst all of this dross that feels safe and familiar. The next trap isn't what you bought, it's what it costs you over time. So now I'm going to show you how you could save potentially tens of thousands in fees even with a relatively modest amount invested in one of these seemingly low-cost ETFs. See, the problem begins with complacency, and this is what's driven $20 trillion in assets into BlackRock, Vanguard, State Street's ETFs, and it's earned them over $7.5 billion in fees last year. They market these funds as set-and-forget solutions with fees that feel almost irrelevant when you first see them. So what happens is that You sit with them for decades, maybe topping up a few hundred dollars each month. And this is where the trap appears, because as we know, investing works through compounding, and that means costs compound against you too. And once you layer these unavoidable platform fees that I'm about to show you now on top of this, what looked like a low-cost decision could end up costing you a bloody fortune. So let me break this down for you here. I'm going to be using numbers from Charles Stanley. They're a big pension provider in the UK, and Here I've run the numbers based on a starting amount of $50,000. You can assume this is dollars, pounds, whichever you prefer, at a historical 7.6% return invested in that JP Morgan ETF that we've just seen with a 0.35% annual fee over 30 years. If there were no fees, you should end up turning that 50 grand into just over $450,000 at the end of the period. But we need to first of all take that fee into account. Doing so sees you run up a cost of about £45,000, even with that seemingly insignificant 0.35% per year. The cumulative drag, which is another way of saying not what I get up to at the weekend, but this is the cost added up over the years of those fees compared to your final pot. It will reduce your pot by about 10%. But this is where the next layer of fees comes in, and this is the one that a lot of investors overlook. In the case of Charles Stanley, and this is true for many of the other platforms out there, whether it's Hargreaves Lansdown and so on, they will also charge you for having your investments on the platform. So in this case, it's 0.3%, so it's pretty much the same again. And you can see how the fees then begin to work through here, and the total cost becomes closer to 60 grand over the years. So the cumulative drag there is almost 13% of the final amount of your portfolio. There's always another fee when it comes to brokers and platforms. If you are a UK investor like myself buying typically US-listed or dollar-denominated funds, you're going to face an FX fee as well. In the case of Charles Stanley, at half of 1%, it's not too bad. I've seen this closer to 1%, I've even seen it above there, and it is tiered depending on the size of your account, trading activity. So when we work this through, whilst it's not as significant as the other costs here, that's where we get a very clean 60% and it adds— I should say detracts— another 1% from your final pot. So the cost of investing here between the ETF fee and then these additional layers of the platform fee and potentially also an FX fee is really beginning to drag down the value of your final portfolio. So I want to show you an alternative. Instead, investing inside of the same account with the same assumptions in single stocks because the fees are a bit different. We will assume that you're buying a portfolio of 20 stocks initially, so you'll have 20 dealing commissions which comes to about £275 or dollars if you were working on those terms. So you can see already that the deduction from your final pot is basically zero. We're talking about 0.06%, so it's absolutely nothing. However, we still are going to be hit with those platform fees, 0.3% capped at a certain level each year. They only add up to £13,000, which is a lot less than we just saw with the ETF. So the total drag on your portfolio, including all of these fees, if you're doing stocks rather than ETFs, is 3%. But there's those FX charges that I mentioned before. But even factoring those in, it only takes off about 0.5% from your final amount. So they're pretty insignificant. When we look at a side-by-side comparison, you can see things more clearly— how investing in one of these supposedly smart or active ETFs on pretty much any platform, in this case Charles Stanley, is going to incur these unavoidable fees. The stock scenario will always see you fare better fees-wise. Now I've put together a list of the best providers for you in terms of both ETFs and stocks depending on what you want to stick to. Not only Charles Stanleys but all of the major providers out there. I'll include a link in the description if you want to go and check that out, and you could even halve the fee that we've just seen in the stock scenario, which is a pretty good outcome. So the industry doesn't need to charge you a lot if they can charge you a little for a very long time. So the real goal isn't simply finding something that's labeled as low cost, it's understanding how these fees add up over the years where the platforms are inevitably involved, and then keeping the total drag on your returns as close to zero as possible by being equally aware of the platform fees so more of the compounding works for you rather than against you. And once you understand that, the next question isn't what you're paying, it's whether you're even targeting the right part of the market in the first place. Because with all these new ETFs to choose from, it's easier than ever to optimize for the wrong thing without realizing it. So let me show you what's actually been driving the returns and where you should be looking to so that you don't end up buying the wrong thing and missing out on performance. There's a tendency investors have called disposition bias, and it's this habit of moving away from what's already worked towards something that feels either smarter, newer, or probably more sensible, and it often comes at exactly the wrong time. So instead of asking what actually drove returns, people begin switching up the portfolios, whether it's regions, moving from maybe the US to global funds, or targeting and eliminating specific styles through smart ETFs. And what you're doing is that you're not only moving away from winning regions but you might also be moving away from the single most important factor that actually drove the outperformance. Take the US for example. People assumed that its dominance was a macro story and that the S&P surely can't lead the rest of the world's stock markets forever. And once that narrative takes hold, you start picking up on every bit of data that seems to validate your view. It's actually known as the Baader-Meinhof, I believe it is, or yellow car effect. So what do people do? They sell the S&P and buy the MSCI World? Or they remove big tech from the portfolio completely, and without realizing, they end up eliminating the single biggest driver of returns. Now, this report from Goldman Sachs sums it up. This wasn't just some trade idea or note that they were putting out. This is a 144-page structural review of the entire US stock market, its future, and what had driven its returns to this point. And what they concluded was that it wasn't to do with the macro that I just mentioned. It was down to resilience, by which they meant quality fundamentals. And you can see this show up in the returns last year for the S&P 500. When you break it down, 5 companies once again for the second year in a row made up more than 50% of the market's overall gains. And many people point to that as fragility and as though these companies are somewhat overvalued or unworthy of generating these returns. But the truth is that they all share something in common. They were all quality factor companies, exactly the kind that I look for. When you look at a global quality ETF and the top 10 holdings, you can see that all of those names that I've just mentioned, with the exception I think of Broadcom, are held within the top 10. You've got a bunch of other names in here as well. Now when you see the performance of quality stocks globally compared to otherwise just investing in the global benchmark, the MSCI World, there's a huge improvement in performance. So it's this factor that was driving the resilience that Goldman's talking about in the US stock market. And when you look at the country breakdown within the MSCI World, the global quality index, more than three-quarters of it are in the US. So in other words, these quality profile companies were abundant in America, just coincidentally. Now this not only improved the returns as we've just seen, but it also reduced volatility, very much like that JP Morgan ETF we looked at was aiming to do earlier. And the key thing here is that it was consistent regardless of whether you were looking at the US, Europe, even emerging markets. Globally, the quality factor delivered better risk-adjusted performance. Now in terms of what we're looking for when it comes to quality stocks, these are the 7 factors that I personally use to find these quality stocks. I won't go through all of them here, but we'll use just one example now of durability. Let's go with this one. You can see in the case of Texas Pacific Land, it basically receives a royalty from leasing out land to oil and gas companies in the US. It's got a very unique royalty model, hence its durable margins. How it excels here— it is the highest ranked stock according to my model for the durability factor. And again, without laboring the point, this is the factor that I used to define durability, which you can see is both very high and also historically very stable in the case of Texas Pacific. And the outcome here is that £10,000 invested, or dollars in this case, invested over the last 10 years would have produced a return of $346,000 profit. So your £10K turned into over $350K. In this scenario. Compare that to the benchmark, the MSCI World ETF, that you could otherwise have put your money into— this ETF slop— it'd have only been worth $37K, a $27,000 profit over 10 years. This is why you need to focus on the right factor as well as eliminating fees. If you want to get a copy of this, I'll leave a link in the description to my top stock report, with this being just one of the examples of the top companies per category that with past performance of course not being a predictor of future results, and this being for purely educational purposes only, hypothetically would have produced a return of that, that you see up there, compared to this very disappointing measly return of the MSCI World ETF slop. So the real edge doesn't come from chasing these new ETFs or trying to rotate between different regions or sectors for fear of what the market's going to do next. It comes from understanding why the market went up in the first place. And in the case of America, it had little to do with geography and a lot to do with the quality factor. And in my view, stocks remain the best way to capitalize on it for the reasons that I've shown you. Whether you stick to the US or you're going to invest in the factor globally, it gives you complete control over what you actually own without the hidden complexity and the higher fee drag of ETFs. And, um, patiently, they can change your life. And if you want to see exactly how to pick them, then watch this next video where I show you the strategy that made me half a million quid last year. Or don't. It's entirely up to you if you'd rather give your money to BlackRock.