Good Article: http://www.businessinsider.com/the-trap-of-passive-investing-2016-12

Main points:

  1. Index ETF’s are ususally cap weighted, so the most expensive large stocks get the highest weighting. this works during those months when the crowd loves growth stocks, but it fails miserably when value stocks are in favor, or during bear market.
  2. Smart beta or sector ETF’s maybe too dependent on one industry or factor, such as consumer staples, pharma, or dividend yield, just like fashion it comes in and out of favor in in long cycles. We have seen this year the Pharma was the darling from 2011-5, then totally imploded since. Staples have also wilted a bit but the cycle lasted all the way from 2011 to this summer.
  3. Bond ETF’s are not diversified, they are concentrated bets in one currency and interest rates.
  4. Best policy is use diversified mid-cap or small-cap equity indexes (if available), with no leaning in value or growth. and hold 5 different countries in 4 different regions of the world. After I learned the hard way, I avoid EU, and Japan. as they are growthless.