Since I am at an ETF conference I thought I might put up a post about ETFs.I perceive a slowdown in the flow of new ETFs and I think a slowdown is a good thing. I think the market long ago tired of different mixes of the same cap and style indexes--the revenue shares were the most recent and hopefully fund companies will focus on more innovation from here.
Many think that actively managed ETFs will be a big deal and while I suppose that could be the case I think the fanfare will be much bigger than the utility. The trouble with actively managed funds, well there are a couple, but in this context the first one is that ETF buyers often like the idea of knowing what they own and knowing what the fund will look like in the future (the turnover in most indexes is quite low).
Knowing what a fund will hold three months from now allows for a portfolio to be constructed that looks forward. With an actively managed fund you do not know what it will look like in three months. This makes building a portfolio with active funds very difficult to do. Obviously poor management or a cold streak becomes another possible issue.
My hope is that we will see fewer new listings but that the ones that actually come (there are many funds that have been filed for ages ago that I don't think will ever actually list) will deliver something that is really new and potentially very useful for paving the way to better portfolio construction.
One example of this would be the recent SPDR Global Inflation ETF (WIP) which I wrote about for TSCM here. WIP provides access to something that really is different. Perhaps there is some future for solar ETFs or shipping ETFs but I think currency, foreign fixed income and absolute return ideas could be very useful along with some really outside the box stuff like the filed for but not yet listed carbon credit ETF/ETN (that one could be a lousy investment for all I know but learning about the carbon credit market and taken as an example for outside the box it is worthwhile).
Progress in this direction will be slow as funds, regardless of the wrapper need to be at least break even and hopefully be profitable. More assets makes or breaks funds so the gamble a company takes is not insignificant but we can hope.
The thing that I am trying to do is learn as much as possible about products that deliver some of the attributes sought from currency, foreign fixed income and absolute return regardless of the product wrapper.
10 comments:
Granted this is a difficult investing environment, but it would be interesting if someone at the conference discussed how etf performance has varied from the glowing backtested results they're built upon. I'd guess most have underperformed by some magnitude of standard deviation.
Flackdoodle!
Just kidding.
So what sort of water does this comment hold? If you think this is a bear market how was the backtest of whatever fund you have in mind during previous bear markets if they go back that far.
If you are talking about a broad based WisdomTree fund I would imagine, although I have not looked, that they have not done so well compared to their backtest because dividend weighting favors financial stocks. While not unprecedented that financials lag or more precisely are the starting point for the bear it is not a common occurance either.
Every article I ever wrote about WT's broad funds (here I am talking about for TSCM) I included a caveat about this as I have been underwegiht financials ever since their funds started.
You've mentioned revenue weighted indexes several times. I saw an interesting post about their offering: http://www.indexuniverse.com/sections/breaking-news/10/3723-new-etfs-take-different-twist-on-sap-indexes.html
It may not be innovative in the sense that it is a new or creative idea, but it does seem to be an effective method to weight standard indexes. It has some stark contrasts to other index ETFs. For one they beat their benchmark year after year by a nice margin and it applies to all the stocks in a known index like the S&P.
Rogers/Elements has an interesting ETF lineup that apparently tries to fill in gaps in what's available elsewhere.
http://www.elementsetn.com/ProductsPage.aspx
(apologies if that's been frequently mentioned here before).
We're back to "The Manager" whether it's an ETF or a mutual fund, as far as I'm concerned. If they think lower expenses will make the difference, why are low priced managed Vanguard Funds underperforming their index funds. I still prefer knowing my manager and how he performs in all markets.
That's where I start.
Roger, are we ever going to see an inverse bond ETF? I know you've mentioned these in the past. One that rises when yield rises? Sort of like RRPIX or RYJUX ...
ProShares has filed for for several short and double short fixed income products.
Good stuff. Thanks Roger.
What about a simple CPI ETF?
A quality floater ETF would probably do better than a CPI index fund because interest rates tend to react much more quickly and strongly to perceived overall inflation and/or in reaction to Fed moves as it fights inflation.
The time delay and composition of the CPI aside there is some incentive on the part of its creators to keep it subdued because of it's link to COLA and, by the same token, since TIPS are tied to CPI they can suffer similar faults.
Frankly TIPS make much more sense for those facing COLA liabilities (like annuity funds), most individual investors actually wind up paying a premium to hedge a liability they do not have and that reduces the impact of TIPS on the liability they do have which is the purchasing power of their money.
All in all I prefer quality floaters plus regular T-bills/notes.
A pair of ETF's, one tied to a high quality floater index the other tied to a high quality inverse floater index, could be useful too so one could boost returns when interest rates trend downward as well as upward.
I say all this despite the experiences of the past couple weeks wherein the Fed has either lost interest in fighting inflation, gained interest in actively investing while accepting liabilities of dubious quality, lost its collective fiduciary mind, or is seeing something that scares them so spit-less that I don't even want to know what it is.
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