ETFs, Indexation Threaten Mutual, Hedge Funds: Michael R. Sesit (Bloomberg)

It's interesting every now and then to see what really are the primary questions facing investors grappled with in the mainstream financial media commentary, which is usually so fixated on the latest financial markets "noise". Here's a little commentary of my own. It's helpful article and a good read. A link is below.

The article is generally right on. Quibbles? Yes, I have a few. Sesit refers to ETFs as an "asset class". No. No. No. ETFs are no more an asset class than open end mutual funds are, despite the dumb pie chart you see each month on your brokerage statement! They are a financial investing vehicle which can be used to invest in one or more particular asset classes, i.e., US large-cap stocks, emerging market stocks, various types and duration ranges of bonds, or also quite usefully, investment "styles" in a particular asset class, such as US small-cap value stocks, or even economic sectors, such as consumer durables companies.

More recently, the field has widened to include more diverse approaches, still useful and well worthy of acceptance, such as the "fundamental indexing" approach used by WisdomTree. But it's come to the point that you can get ETFs built to invest in companies with left-handed Sagittarian CEOs, companies with cute corporate logos, companies in industries not yet discovered, and companies most likely to be acquired by extraterrestrials. Well, not yet. Wait a while. ETFs have been created for fanciful "indexes" that are neither asset classes, sectors, or investment styles. In other words, a mixed bag, just like mutual funds. Good and bad ETFs exist. ETFs are just not an asset class.

Are ETFs somehow a "threat" to open-end mutual funds and hedge funds? No more than open-end actively-managed mutual funds are a "threat" to investors! Yes, they are gaining market share, presumably at the expense of the worst of the active funds. If so, thank God. The article suggests that hedge fund replication ETfs are a threat to hedge funds. May it be so. One can hope. How much money do investors have to lose to learn that lesson?


Bloomberg.com: Opinion

ETFs, Indexation Threaten Mutual, Hedge Funds: Michael R. Sesit

Value Line's CEF -- Discussion of Mark Hulbert's Marketwatch Article

Value Line's closed-end fund, the First Trust Value Line Fund, FVL, has been trading at a discount to its NAV, its net asset value, per Mr. Hulbert, who writes for MarketWatch, mostly on newsletters. If there is a more tireless student of investing newsletters, I don't know who it could be. FVL is being converted to an exchange-traded fund.

Some points from the article: The CEF was trading at a 7.8% discount to NAV on February 5. Last year, per Mr. Hulbert's calculations, "a portfolio of Value Line's top-ranked stocks lagged the Dow Jones Wilshire 5000 index by some thirteen percentage points." Ooh, man, that hurts to think about. There you have the basis for the discount, I guess. He points out that Value Line's stock rankings have struggled for the last five years. Mr. Hulbert's research does indicate that over 26.5 years tracked, Value Line's picks have beaten the Wilshire 5000 by an average of 2.6 percentage points, so it has done well over time. In fact, that is a record worthy of respect.

It could do well again. It's a proprietary, undisclosed system, so it is pretty much impossible to formally research. One man I know even refers to it as the "Value Line anomaly." It's rather like a black box, research-wise. And it is difficult for me to endorse someone's black box investing approach. Sorry, I'm just funny that way.

Here's the article:

Conversion of Value Line fund presents unique opportunity - MarketWatch

FT - "Claims staked in [ETF] land grab"

As I noted before, the expansion of the ETF zoo has gotten pretty ridiculous. But I'll let you in on a secret. If, if mind you, I was into such things, and mostly I'm not, I would look every now and then at an ETF, active or passive, preferably passive, of smaller tech-related businesses located in Massachusetts. Hmm. It's just an interesting area. I won't even sue if someone takes the idea and runs with it. Just find a way to defend it from front-runners.



FT.com / Wealth / Hands-on investor - Claims staked in land grab

FT - "Investment vehicle could be a ‘better mousetrap’ for managers"

It's interesting, but I am still somewhat skeptical. 'Actively managed ETFs can perform better than open-end mutual funds because the managers are freed from the need to make purchases of stocks to deploy cash inflows'? But someone, the arbitrageur, has to buy the stocks, the 'creation units', exchanged for the the ETF shares, right? That's how ETFs work. It's formulaicly-driven, rather than analyst-driven, as to which stocks are purchased, but stocks get bought, by someone, when people want to buy the actively-managed ETF, at least while the ETF is ramping up in trading volume, and as buyers outnumber sellers. I just don't see that the conclusion, enhanced performance, necessarily follows from the reasoning in the article.

Anyway, watch for a lot of hype when the actively-managed ETFs begin to show up en masse. If what has happened with ETFs already is any indicator, there will be some really strange and useless critters evolving in this part of the financial arena. Hype will trump real utility for building portfolios. I can see it now, the 'Best-performing Small-cap Flashlight Makers' ETF; and its derivative concept for those feeling a little down on that group, the Double-inverse Worst-performing Small-cap Flashlight Makers ETF, etc. Boy, won't that be great!



FT.com / Wealth - Investment vehicle could be a ‘better mousetrap’ for managers

Bankrate.com via yahoo Finance: "Don't let your tax break get washed away"

Pretty good review. If you captured some short-term losses last year, but want back in, be a little careful how you do so, as the article discusses. Incidentally, if you are in an advisory relationship, a way you might evaluate the service your advisor is giving you, if you have some money in a taxable account, is does he harvest material short-term losses for you each year when they exist? If not, ask why, and get a good explanation.

Also, does he only think about this subject near the end of the year? You can take short-term losses whenever they come along, unless you are invested in such a way as to preclude your doing so. For example, some otherwise excellent no-load mutual funds have short-term redemption fees. And of course if you've been placed in load funds, where there are sales charges, etc., the whole idea becomes problematical.

ETFs are very usable for tax loss harvesting, and usually there are pretty good choices for replacement holdings to avoid the possibility of a wash sale rule problem


Yahoo! Personal Finance

FT - "ETFs: winning concept's meteoric rise"

A nice review of current status and how ETFs are changing, though I'd be wary of speculative approaches like those listed at the end of the article. You just don't need to speculate, and leveraged ploys are not winners for most of those who use them.



FT.com / Wealth - ETFs: winning concept’s meteoric rise

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"ETFs with no fund managers - just logic" -- FT

Good article on some of the thinking about the new "fundamental ETFs". Keeping an open mind here. But not yet ready to incorporate any of these into client holdings.


FT.com / Wealth - ETFs with no fund managers – just logic