We are flying back home on Saturday. Judging by the picture it looks like a lot has changed while we've been away. Actually the green was a tribute to Red Auerbach as the Sox had a serious come from behind win against the Yanks.Here is a link to a Barron's interview with Robert Arnott. He sees equities averaging 5-6% per year over the next ten years.
He manages the Pimco All Asset fund which has been very underweight stocks and a focus in the interview was that he reduced stock exposure too early.
This is a good reiteration of a point I have made many times about not needing to reduce equity exposure too early. Bear markets start very slowly and give plenty of time to miss a big chunk of the pain.
His first ETF, PowerShares RAFI 1000 (PRF) was also discussed. The fund has soundly outperformed the S&P 500 since inception. I opined for TSCM 15 months ago that PRF, despite its holdings, might quack like a small cap product. Arnott actually called me at my house to politely (he really was very nice on the phone) tell me I was wrong but you can click here and decide for yourself.
Here is another link, this one to an excerpt from Jack Bogle's book in BusinessWeek. I disagree with a lot of what he says but he is Jack Bogle and it is worth reading.
He thinks specialized products are a bad tool because they lead to speculation and detract from the proven strategy of indexing. I look at the problems he cites as being more about flaws in human behavior than flaws in the products. Clearly a lot of people don't really know how to use narrow-based products and chances are most investors don't need a collection of nothing but sub-sector funds but they do offer utility and there is a correct way to use them which starts, I think with moderation.
He used the example of semiconductor ETFs as not being a tool for diversification. A semiconductor fund has a great chance of being mis-used but the stock market is made up of a bunch of sub-sectors.
Semiconductors account for about 6% of the S&P 500 (my math: tech is 15% of the S&P 500 and tech, as measured by iShares Tech IYW which is a client holding, is 40% semiconductors) so the group is far from obscure. A 15% weight to semi's is probably a lot but still every sub sector has some weight in the market. If you are going to equal weight everyone of them well then yeah you should just buy an index fund.
However if you want make active decisions about sector and sub-sector weights, and you have an understanding about how to do that, but don't want single stock risk you are going to use sector funds.
13 comments:
Roger,
If you add IVE (S&P 500 Value) to the chart you linked, you will see that PRF is much tighter to this than to the IWM (Russell2000). The tight fit of PRF to IWM doesn't start until June, when the Russell 2000 is revamped.
Great pic of Varitek, a former jacket. Safe travels.
All I know is I am using ETFs more and more for profitable swing-trading this year because it's a great way to make quick money in a hot sector and avoiding single-stock risk at the same time.
REW your comment about IVE makes perfect sense, I should have thought of that, thanks
I keep a watchlist of clearly active hybrid etfs, all of them either from claymore or powershares..about 14 en total. YTD results do not include distributions. 6 have results over 7 %, 8 are loosely close to 5%(my russell 3000 bmark) and none a dog. These would be buy hold positions for sure, too little liquidity, and I think worth consideration for the lazy port. I'd be curious for Roger to pick some on merits of low correlation, theme, or whatver. Beat the benchmark: csd,dbv, xro,nfo,def, pgz, piq,psp,pvm. Lagging a little: otp,pkw and largest laggard but not too bad...sth. I might add that dbv has best overall momentum when adjusting for volatility. If I was to closely examine what's under the hood I might talk myself out of these products, but it is hard to discount the return...ummm, so far.
Roger you hit the nail on the head regarding the Bogle article. Sure index investing might be the best thing for a lot of people. But there are a number of sophisticated investors who can greatly benefit form the range and flexibility of ETFs. Could an investor who should be in only index funds get in trouble with ETFs? Sure - but that's not a problem with ETFs, that's a problem with the investor!
Frankly, that article made me think that Jack is starting to lose it (not to mention that it has just a hint of sour grapes). Index investing was a wonderful innovation and we all love him for it, but now it might be time for Jack to retreat into the shadows instead of penning rather misguided rants like this.
Powershares Rafi 1000
Large-Cap Growth 15.03
Large-Cap Value 53.74
Mid-Cap Growth 6.05
Mid-Cap Value 21.66
Small-Cap Growth 0.60
Small-Cap Value 2.92
from Powershares site.
Bogle is jealous. If we are not talking about THE SP500---he is not pleased. but, that index hurt a lot of people the last 7yrs.
It's always ALL about Bogle, though.
Bogle is so much in demand that he was on the Tavis Smiley show a day or two ago.
I expect reparations for having run into this PBS abonination while channel surfing.
Ditto rew - PRF doesn't look anything like IWM.
Bogle has done a great service for investors over the years by popularizing indexing and keeping fees low. That said, he has a very narrow view of what works and has decided that everyone should invest exactly the same way he does.
I agree that buy and hold and broad indexing makes sense for the vast majority of investors. (before the flames begin, keep in mind most investors have no interest, aptitude or time for investing and don't have the assets or income to be of any interest to a good advisor). You could do a heck of a lot worse that using a Merriman-like portfolio imo.
My biggest disagreement with Bogle is the allocation of U.S. Large Growth he recommends.
Models this week:
Timing Model = 5.0
100% long
Global allocation of long positions:
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
Top U.S. Sectors
U.S. Telecommunications 5.0
U.S. Pharmaceuticals 4.5
Mid Cap Value 4.5
U.S. Basic Materials 4.5
U.S. Real Estate 4.0
U.S. Utilities 3.5
Top Intl. ETFs
MSCI Malaysia Index Fund 3
MSCI Australia Index Fund 3
MSCI Germany Index Fund 3
MSCI Mexico Index Fund 3
MSCI Pacific ex-Japan Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Sweden Index Fund 3
MSCI Netherlands Index Fund 3
MSCI EMU Index Fund 3
A couple interesting developments this week; my timing model ticked down half a point as Goefert's Advisor/Investor sentiment model moved back into slightly OB territory. Also, the global allocation weighting changed a bit - EAFE is now 40% and the U.S. is down to 30%. EAFE stocks are pound for pound out performing both the U.S. and Emerging. Here's the Std. Dev and Sharpe Ratio for all three (3 year trailing up to 3-31)
EFA Standard Deviation 9.44 Sharpe Ratio 1.58
EEM Standard Deviation 18.44 Sharpe Ratio 1.24
IVV Standard Deviation 6.94 Sharpe Ratio 0.90
The Sharpe Ratio for IVV (S&P 500 index) is a measly .90.
Last thing: Pharma is now finding itself in my top sector ranks lately.
I expect some backfilling over the next week or so, so I backed off my 2x long positions on the close of Friday.
Off the main subject,
On his website (husmanfunds.com), John Hussman provides a link to Feb 9 interview.
(Going Full Cycle).
In this interview he describes his hedging technique (example of S&P 500 @1446, long
a S&P put @1430, short a 1400 call). He says the implied interest on the hedge is
somewhere about the T-bill rate.
I would like to, but do not comletely understand his hedge and how its implied interest
rate is derived. I would appreciate an explanation from anyone who does.
Jay Charles
Jay,
The building block for interest in the context as I know it as follows;
Lets say you sell a naked put struck at $25 for $1.25 expiring in one year.
Being short a put has a requirement to maintain the position. The minimum might be $625 or if done in an IRA the put might need to be cash secured so the requirement would be all $2500.
For a cash secured put would be like a 5% interest rate. This is my understanding.
A combo trade done at a credit is the same thing. There is a requirment, there is premium brought in and so an implied interest rate.
Roger tells Bogle a thing or two....
Now that is funny.
Are we a little full of ourselves in Kansas?
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