In the field of investing, we talk about “headline risk.” Headline risk is something in the news with the potential to affect one’s portfolio in a negative way. It’s an appropriate term if we’re talking about, say, Herbalife (HLF), which is being forced by the Federal Trade Commission (FTC) to alter how it compensates its distributors.

In the world of investing, the tragic events that occurred in Baton Rouge, Dallas, Nice and Turkey prior to this month’s issue being sent to the printer were technically categorized as “headline risk.” But using that term to describe them comes across as callous to me.

Given the length of our investing time spans, we will see more headlines that shock, sadden or anger us—or some combination of the three. It’s an unfortunate aspect of humanity. Yet it is part of our job as investors not to let our feelings about these events influence our portfolio decisions. We can’t control the headlines, but we can control what we do with our portfolios.

If you are unnerved by the recent headlines, realize that you are not alone. The New York Times published an article last month offering advice on how to cope with the seemingly endless headlines about violence. Among the suggestions were limit exposure to news—both from traditional and social media—to designated periods during the day, stop and take deep breaths whenever you start to feel anxious, and maintain your daily routine. The advice applies equally to headlines about the market and the economy.

Speaking of unnerving news, right after last year’s ETF Guide arrived in your mailboxes, several exchange-traded funds plunged far below the underlying value of their assets. News out of China and weak global markets on August 24, 2015, caused U.S. stocks to open with a very bad case of the Monday blues. A combination of volume, downward volatility and multiple stock exchanges (aka, “fragmentation”) led to ETFs trading at discounts of 20% or more to their underlying net asset value.

The large disconnect between ETF market prices and their underlying value didn’t affect long-term investors who simply sat tight in the face of the volatility. Only those who were trying to trade—in particular, by using market orders to sell at the prevailing price—were affected. It was a good example of how not reacting to the day’s headlines can help your portfolio.

This is not to say everything is perfect in ETF land. Many institutional investors are using exchange-traded funds for their higher levels of liquidity (the ability to transact at prevailing prices.) Rather than trying to trade individual securities, these large investors simply buy and sell the ETFs representing the asset class or strategy they are trying to target. A March 2016 Financial Times article cited research showing that 43% of U.S.-based institutional investors invest at least 10% of their total assets in ETFs. The same article cited a different study showing that three-quarters of surveyed institutional investors prefer an S&P 500 ETF over S&P 500 futures contract.

Given the volume in large-cap stocks, the large presence of institutional investors in ETFs following a popular market-cap-weighted index like the S&P 500 should not be a problem. It can be a problem for ETFs investing in less frequently traded assets, such as high-yield bonds, smaller countries and specific industries or themes. An illusion of liquidity exists when the assets underlying an ETF (or mutual fund) cannot be easily bought and sold, but the shares of the fund can.

On an upbeat note, AAII founder and chairman James Cloonan’s new book, “Investing at Level3,” is coming out this month. Among the strategies Jim gives in the book is the all-ETF Level3 Passive Portfolio. He previews this new approach as part of his quarterly Model Fund Portfolio column here. Those of you who have yet to order the book can do so by going to www.level3investing.com). Having already read it, I personally recommend adding the book to your (late) summer reading list.

Wishing you prosperity, 

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII