Broad Based Indexing Evolves

There was an article on Marketwatch titled Investors Warned About Risky Structured Products. It is surprising that complicated products still have any audience at all given the details of the financial crisis and the anguish that many investors went through using them.

Some of these trade on exchanges (or at least they used to) and some don't. When thought of at the portfolio level I think the simpler the better. Simple means individual stocks, individual bonds or plain vanilla ETFs to access these asset classes. This is the building block. On top of that I obviously think a modest allocation to some sort of absolute return strategy which may be a little more complicated is reasonable and does not jeopardize the entire portfolio. In this context I prefer relatively simple like the strategy used in RYMFX (client holding) that is long a commodity or financial future that is above its 7 month moving average and short a commodity or financial future that is below its 7 month moving average as opposed to a very active, black box strategy. But that is just my preference.

For people willing to take the time, the world of plain vanilla continues to expand both with narrow ETFs and now with ETFs that tweak broad indexes. The investor who buys a structured product with a lot of moving parts is looking to delegate some aspect of the task. This is not universally bad but can end badly.

For people unwilling to assume the risks and volatility that go with individual stocks, ETFs have long provided narrow solutions (and the selection continues to improve) along with broad based solutions that remain generally static which allows for better understanding what you own. Many investors can understand the S&P 500. It is broad, covers a lot of sectors, has companies like Apple, Bank of America and Exxon.

Once an investor does understand the S&P 500 (understand is not a synonym for outperform) they can then understand some of the funds that tweak the S&P 500 like the flurry of reduced volatility spins on the index. If you generally understand the SPX you can understand what increases the volatility and what decreases the volatility. This allows for changing the expected behavior of a broad based portfolio in a way that is still transparent (and derived off an index that is relatively easy to understand) but does not rely on complicated and expensive products.

I still prefer using very narrow based products (individual stocks and specialty ETFs) but I've always understood that not everyone will do this, most will not. It is getting easier for those who will not to target more suitable portfolios for their volatility tolerances. Check out PowerShares and Russell ETFs for more on this.

Long time readers may recall that I grew up in Boston so the Bruins winning the cup is a very big deal by itself and also in terms of continuing an incredible run for Boston Sports. During the intermission between the second and third periods I flipped over to Red Sox post game coverage and studio host Tom Carron and Dennis Eckersly were talking about the hockey of course. Carron made a very insightful point in noting that Boston fans no longer expect to lose these games. He is right and that is an amazing shift in sentiment and psychology. There was a moment in the third period last night when Burrows the biter could knocked down and Zdeno Chara, Adam McQuaide and a third Bruin were standing over him and I immediately thought "Big Bad Bruins." I also think that the Bruins invoking Bobby Orr before game four was the end of the Canucks, seriously I think that psyched them out.