Protecting Capital: An ETF Manager Results Example

May 12, 2011

Many people still equate ETFs with ‘passive’. While it is true that most ETFs track indexes, dynamically choosing and assigning allocations to indices is as active as anything you can do.

Recently, we listened in on a panel with an ETF investment manager that currently has $2 billion under management. This fund manager stated that it decides its exposures based on 3-factors:


1. 50% Momentum Models

2. 25% Valuation & Monetary Policy Considerations

3. 25% Sentiment Models


Here are the published returns:

Note that despite a successful hedge-fund profile of returns, the fund did lose money in over one-third of all months. This is similar to many of the (successful) backtests we run, there is a cap on the % of up months any return-oriented fund can accomplish. It should encourage you to reduce the volatility of your portfolio to know that you will likely lose money at least one-third of the time. This should help temper your risk appetite somewhat as the nature of compounding dictates you obviously do not ever want to drawdown a large percentage.

Below we lined up all the 1-month returns from low to high. We like this visual because it should be obvious that most of the time, you should expect some low return – plus or minus. Limit your drawdowns and then during some point of the year, you would like to catch some type of trend and be overweight that group -- be it in natural resource stocks, domestic REITS or intermediate treasury bonds.


The point is really that whether you are a conservative investor or an aggressive investor --- you can pursue strategies at different weightings with the core-satellite structure. If you are conservative, then your satellite strategies can be smaller and your core more defensive. If you are aggressive, then you can run your satellites at a higher weighting. But in the end, the goal is essentially the same --- protect and grow capital.


Addendum: In a recent conversation with a venture capital investor --- he called anyone who doesn't actively advise the company on strategy and help make introductions on behalf of the company to customers a 'passive' investor. Its all a matter of perspective I guess.


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Schwab ETF Traction

May 11, 2011


CFA Institute on Relative Importance of Stock-Picking: Focus On What Really Matters

May 09, 2011

"There is now a greater understanding on the part of institutional investors that asset allocation is the issue rather than stock picking.” The CIO of a pension fund in northern Europe concurred: “Strategic asset allocation has always been a more important driver of returns than the selection of asset managers that pursue outperformance vis-à-vis a market benchmark.”



CFA Institute Publications Link believes that exchange traded funds will increasingly be viewed as the core building-blocks of modern portfolios -- not individual stocks. There is much larger value to be added in the decision to own the Australian market (EWA) and REITs and Commodities than spending too much time on the decision of which large-cap United States stocks to own.

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Yield To Maturity Charts Don't Tell The Full Story

May 05, 2011 in Bonds

Something to consider with bond funds.

You will often see charts in blogs and articles of 10 or 30-year bond yields plotted over time -- but from an investment perspective and when considering portfolio performance, realize that the 'meat' of the bond market is only remotely related to the 30-year.   The AGGREGATE bond market is a collection of bonds with an average maturity in the 4-5 year range.    There actually is not a single bond in the iShares Aggregate (AGG) with a stated duration anything approaching even 20 years.   None.

The 5-year yield is a good place to focus.   As of yesterday, this was 1.95%.  We scanned the history and found that on June 7, 2010 -- the yield was the same at 1.95%.   So we have unchanged TREASURY yields since then.  



But treasury bonds are just one piece of the landscape (an important piece but there are of course many others).   Below is a comparison of a few bond funds total return series since June 7, 2010.    Viewing the total return chart is not the same thing as viewing a yield to maturity time series.     We would say that the total return is much more applicable in terms of understanding movement --- as this does not strip out the distributions you earn along the way and will reflect changes in credit spreads automatically.   Total return charts are not just for bond funds obviously -- they are better for any investment that produces a cash flow.   The total return series (which is what indexes are) is a cleaner reflection of how investments perform --- and performance is what matters.



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Highest Volatility In ETF/ETN Universe

May 03, 2011 in Volatility


FWIW, of all exchange traded products > $500 million in assets, Silver (SLV) has the highest 20-day standard deviation and is more volatile than even the 3x S&P 500 (UPRO).



Snapshot Of Performance YTD Through April

May 02, 2011




Warren Buffet vs Bill Gross vs Index ETFs

Apr 30, 2011

With the Berkshire Hathaway annual meeting this weekend, we thought we would show some charts on trailing 7-year performance.   In the consulting community, seven years is considered ample time to compare results.  

As investors, why should we care how a given fund does versus its stated benchmark index?  What we ultimately want to do is find strong performers while staying within our own risk tolerance --- not attempt to add a few percentage points over a poor-performing benchmark with security selection.

BRKB Berkshire Hathaway Common Stock  (Warren Buffet)

PTTRX Pimco Total Return Bond Fund  (Bill Gross)



It should be quite clear in the charts above how some basic strategies could benefit your timing of such volatile indices as Australia (EWA) and Energy (XLE).


Buying Weakness vs Buying Strength

Apr 30, 2011

As the Japanese tsunami reached its zenith and rumors were swirling about nuclear wind possibly going into major Japanese cities, an intermediate low was reached. Another instance of how watching the present news too closely can lead to bad investment decisions -- a classic problem well-documented in behavioral finance.

Furthermore, if you look at the asset flow data, you can see that money poured into Japanese ETFs -- such as EWJ.   'Buy the dip' was the message.   But the Japanese market has not bounced nearly as well as other country funds.   Buying relative strength instead of buying weakness was once again the better performance play.

Below is a chart of the 10 largest commodity funds (in assets). We equal-weighted this to create our own 'commodity index' using the Free Portfolio Combine page.




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What Happens When The Dollar Index Goes Down?

Apr 29, 2011

With the US Dollar in the news and opinions about what it means running rampant, it may offer somewhere to start by showing what has actually happened over the last 12 months on days when the dollar index goes down:



Down Day Association Stats

In reality, you should look at many different timeframes and lookbacks and % decline scenarios.   This is quite easy to do with the navigational controls at the top.  

Once you've seen history, you may or may not choose to go with the historical facts -- but at least you know what the historical facts are!

Note the very low correlations in the right-hand column and the very obvious fact that foreign securities outperform due to the currency effect.


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Some ETF Structures Are Flawed As Investments

Apr 26, 2011

Quick Tip: The U.S. Stock Market over the past 18 years has an annualized standard deviation of about 17%. One good clue that an ETF structure is dangerous is if the volatility is multiples of this, i.e.  40-150%.   Volatility is easily viewable on our ETF Charts and ETF Screener pages.


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