Elm Wealth warns stock picking may hurt retail investors

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Elm Wealth warns on stock picking

Highlights

Victor Haghani of Elm Wealth warns that retail investors seeking to outperform the market often underperform by picking stocks or using elaborate ETFs.
Haghani states that sophisticated trading strategies generally benefit large firms with advanced technology and infrastructure, disadvantaging retail investors in competitive markets.
Valerie Grimba of RBC Capital Markets argues that specialized ETFs, including concentrated or derivative-based funds, can provide beneficial exposure and income if investors understand their structure and risks.

Debate over retail ETF strategy

As reported by CNBC, Elm Wealth founder and chief investment officer Victor Haghani says retail investors trying to outperform the market are often better served by broad index funds than by selecting individual shares or using more elaborate ETFs. He says investors remain vulnerable to behavioral biases, especially the tendency to assume recent market trends will continue.

Haghani, a founding partner of former hedge fund Long-Term Capital Management, says his current firm prioritizes cost-effective investment strategies. He argues that it remains hard for individual non-professionals to generate alpha and says broad index exposure serves many retail investors well.

He also says wider access to sophisticated strategies does not necessarily create an edge for smaller investors. In his view, large trading firms with vast technology budgets and market infrastructure are better positioned to capture opportunities, leaving retail participants at a disadvantage when taking the other side of trades.

Specialized funds still have a role

RBC Capital Markets director of global ETF strategy Valerie Grimba takes a more supportive view of sophisticated funds in the same interview, saying more choice is ultimately beneficial for investors. She says concentrated funds holding 10 to 15 stocks can provide exposure to investment themes without requiring investors to identify the single eventual winner.

Grimba also says derivative-based products can be used to generate income in different ways, but she stresses that investors need to understand the holdings, structure and trade-offs of any strategy they buy. Her view suggests the growing ETF menu can support portfolio customization, provided retail buyers can clearly explain what the product owns and how it works.

Our earlier article on India’s disinvestment programme highlighted how the government has raised most proceeds since FY 2016 through market-linked routes such as ETFs, public issues and buybacks, with strategic sales contributing relatively little. It also explained why the planned IDBI Bank stake sale stands out in size and could help the government close the gap versus its annual disinvestment target.

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