Displaying items by tag: ETFs

(New York)

The move towards passive management has been worthy of the term “flood”, with investors pouring funds into ETFs and out of mutual funds. Fees have been a major part of that shift, but performance has been too, as active management performance has been broadly weak over the last decade. However, there are some areas where mutual funds have significantly outperformed passives—international funds. Especially in emerging markets (e.g. India and Mexico), but also in developed ones like the UK and Italy, 10-year track records show significant outperformance for active managers. The opposite is true in US funds.

FINSUM: Sifting through market opportunities gets harder and harder (and finding alpha alongside it) as you move into less liquid markets. Accordingly, we think there is a lot of benefit to using actively managed funds for international stocks.

(New York)

Fund fees are a hot area, and not just in terms of them falling in absolute terms. While everyone is aware of Fidelity’s new zero fee index funds and the price war going on in top line fees, there are also new and interesting fund structures emerging. One kind of new fee model is called a fulcrum structure, where fees are low (ETF-like) unless the funds outperforms its benchmark, in which case the provider gets a performance fee. This kind of structure is more popular with mutual funds and can offer the best of both worlds—low fees for ordinary performance, or outperformance that comes with active management.

FINSUM: We think these kinds of funds offer a better alignment of interest while offering multi-sided benefits. However, the risk is that managers are incentivized to take excess risk in an effort to boost performance over the fulcrum threshold.

(New York)

There is a big development happening in fund management. That is change is that fundamental and quantitative approaches are merging. Often, funds are no longer purely fundamental or quantitative, but instead merge the two, creating a whole new category which is starting to be referred to as “quantamental”. In its most simple form, quantamental often looks like a multi-factor ETF that also includes some continuous “human” intervention, such as reducing statistical quirks. However, more sophisticated approaches truly blend the two, using human skill to analyze stocks which are sending promising technical signals.

FINSUM: We are pretty fond of the principles which underpin quantamental approaches as they seem to take the best aspects of both philosophies. Time will tell if the approach is a winner in a broad sense.

(New York)

Quantitative ETFs are growing in popularity. Using rules-based approaches to stock-picking is cost effective and has proven successful in many cases, making quantitative methods a good fit for ETFs. With that in mind, here are seven of the best quantitative ETFs: QuantX Dynamic Beta US Equity ETF (XUSA, 0.59% fee), Hull Tactical US ETF (HTUS, 0.92% fee), Cambria Global Momentum ETF (GMOM, 1.03% fee), U.S. Quantitative Value ETF (QVAL, 0.49% fee), IQ Chaikin U.S. Small Cap ETF (CSML, 0.35% fee), Vesper US Large Cap Short-Term Reversal Strategy ETF (UTRN, 0.75%), and the SPDR MFS Systematic Growth Equity ETF (SYG, 0.61% fee).

FINSUM: CSML was the most interesting of the group for us, as we think there is more alpha to be had in small caps with these sorts of approaches. We also ran this story in case anyone has clients who have been asking for more quant funds.

(New York)

As our readers will know, we spent the better part of last week at the Inside ETFs conference. As part of our time there, we are planning to feature a couple of ETFs which we think might be interesting to advisors. The first one we want to feature is a special fund from Legg Mason, the fund is called the Legg Mason Low Volatility High Dividend ETF (LVHD). We were lucky enough to meet with one of the fund’s specialists, Josh Greco, at the conference, and his passion for the fund’s approach really shined through. The fund’s own words describe it best, it seeks to track “the investment results of an underlying index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility … LVHD may benefit investors who want income but are concerned about the volatility that can come from traditional equity income investments”. Basically, the idea is to get yield and upside, without so much of the volatility that is traditionally associated with equities. Mr. Greco contextualized the utility of the approach succinctly and convincingly, explaining that as clients’ lives elongate they are going to need to stay in equities longer to get capital appreciation. Accordingly, this fund seeks to de-risk some of that necessary exposure while still giving significant upside and yield. The fund has about $600m in AUM, is widely available, has an expense ratio of 0.27%, and a dividend yield of 3.48%.

FINSUM: In our mind, this fund does an excellent job of fusing some of the best elements of fixed income (yields and less volatility) with the best part of stocks (capital appreciation). It may be a great fit for older clients that need to keep a significant allocation to equities. It is also quite affordable at 0.27%.