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

Most Penetrating Comment I've Seen on Jerome Kerviel and Societe Generale Yet

David Weidner of Marketwatch: "Kerviel, the bad apple who was smart enough to fool a banking empire but not enough to beat the markets...."

Brilliant. No sarcasm at all intended. Smart enough to utterly defeat whatever passes for internal risk controls at an ostensibly world-class institution, but not smart enough to beat the market. Who's next for a similar story? Goldman? Some other firm? Just a matter of time. It seems these guys are given ambitious goals to meet; they are, when you get down to it, told to win or else at what is rather like a very big ongoing coin-flipping contest. So what do you think is going to happen?


A rogue ruined the financial system? Which one? - MarketWatch

Do-Or-Die Time Nears for Old Investment Indicator -- Bloomberg

Chet Currier has some interesting thoughts on how much cash mutual fund managers have, and other old 'market indicators'.

Pretty nifty one-liner from the article: "Fund managers are good stock pickers but poor market timers". I love it. If most actively managed mutual funds fail in the longer run to keep up with their index benchmarks through stock-picking, then how bad would they be when attempting market timing?


Bloomberg.com: Opinion

The Correction has been Corrected!

So, if the market has made back the ground lost due to the "correction" -- I despise that word -- does that mean that the correction was incorrect? Mark Hulbert discusses it.



February-March correction now completely overcome - MarketWatch

And Trading Isn't Investing Either, Mr. Hoenig

Whenever someone can articulate a rational basis for thinking you can come out ahead by trading, other than wishful thinking, I'll consider it something more than gambling. Technical analysis? Not acceptable, not rational, as there is no objective research support whatsoever.Did you get that, technical analysis is not rational. Fundamental analysis? For short-term trading? Market noise overwhelms whatever merit there might be. In the slightly longer run? Twenty thousand other guys got in before you. You're in danger of being the patsy, the mark, at the poker table. Careful investors win, as markets always have moved up over time. Market returns are good, very good, and available. Some turtles run rather well, it seems.



Investing Isn't Gambling, Though Both Carry Risk (McDonald's) | SmartMoney.com

Very Interesting Bloomberg Piece on Dimensional Fund Advisors -- DFA

Not enough is written about DFA. "D" does not stand for "different", but it really could. Nobody else is quite like them. Their approach is quite intriguing. Nope, I'm not a DFA advisor. To this point.



Bloomberg.com: Exclusive