Displaying items by tag: ETFs

(New York)

Barron’s has interviewed some of the top financial advisors in the country to figure out how they incorporate ETFs into their portfolios. We thought our readers might be curious. Raj Sharma, from ML, said that he thinks ETFs are just a tool and that active management still has a big role to play, especially in emerging markets and small caps. One top advisor, for whom ETFs comprise 50% of their business, says they use options bets against ETFs, something you can’t do with active funds. Another top advisor from ML, Peter Rohr, summarized ETFs nicely, saying: “ETFs allow us to control the controllable. We can control fees, we can control taxes, and we can control risk level”.

FINSUM: ETFs are a very flexible, and largely inexpensive product, facts which explain their explosive growth. However, that flexibility also means it takes strategy to put them to their best use.

(New York)

Any investor in ETFs will have noticed the marked rise of “factors” over the last few years. These are technical or conceptual overlays that managers use to create a theme for a fund. They are generally predicated on some type of data, like “quality” or “momentum”, both of which are well-studied. However, lately there has been an explosion of new factors which are being employed in funds. The problem is that many of these are not being observed on a long enough timeline to see if they are relevant. In practice, this means that a lot of funds are predicated around strategies that do not have any proof of concept.

FINSUM: So we have mixed feelings about this. On the one hand, some factors seem clearly frivolous, while others which may also be quite new, seem to be a good angle on the current market environment. The key is to be very discerning in choosing these types of funds.

(New York)

The last year has seen a steady and encouraging rise of alternative fee structures in mutual funds. In particular, a number of managers have adopted so-called fulcrum structures to their mutual funds. All of these funds charge a low or zero base fee, and then a performance fee for outperformance of their relevant benchmark. The idea is that customers only have to pay up for services that actually outperform benchmarks. Some providers that now offer these funds include AllianceBernstein, Fidelity, Allianz, and Fred Alger. The main criticism of the funds that is that they can skew incentives and push managers to take outsized risk in order to produce upside.

FINSUM: These funds are not without their imperfections, but they are a useful and thoughtful response by mutual fund managers who are realizing they need to do more to justify their raison d’etre versus ETFs. We think they are a good deal for investors because if the results aren’t good, you pay very little, if they are great, you pay for it. Compare that to an ETF, where you are never going to outperform, but will likely pay more than 10 bp.

(New York)

The Wall Street Journal has published an interesting article giving advice to investors on how to assess, and when to dump, losing mutual funds. The article makes the point that investors should not automatically clear out their losing funds, just like they shouldn’t always buy winning ones. Funds have their own reasons for poor performance and those reasons can have a big impact on whether they should stay in a portfolio. Here are four questions to ask in assessing funds, “Does the fund have a good process in place?”, “Is the manager sticking to his or her own guns?”, “Is there a new manager, and do I trust him or her?”, “Is this negative performance coming in a segment of the market in which it is tough to beat index funds?”.

FINSUM: Good funds can have significant down periods, so it is important to have a methodology for deciding if and when to dump them.

(New York)

Well, it has finally happened, but not as anyone expected. The whole industry has been watching for the first zero fee ETF, which just happened with SoFi, but now they are getting the first negative fee ETF. While zero fee index mutual funds debuted last year, ETFs only just got there, until the debut of the SALT Financial Low TruBeta US Market ETF. For every $10,000 invested in the new fund, the issuer will pay you $5. However, as you may have expected, there is a catch. The catch is that once the fund gets over $100m in AUM, its regular fee of 0.29% kicks in.

FINSUM: This is nothing more than a sales gimmick (and they haven’t even structured it well). However, it is indicative of the trend things are heading in.