1:45 – 2:35 – Factor Due Diligence; Which ETF Strategy For Today’s Market Environment

Factors are attributes that help explain the risk/reward characteristics—and price movement—of a security. Researchers have found literally thousands of factors; fortunately, most asset managers focus on only a half-dozen or so when constructing factor-based products. Education is key for advisors to understand how factor-based investing can benefit clients, and this panel will discuss how to access factors via ETFs.

11:45 – 12:35 – Commodities: Is the Bottom In the Rear-View Mirror?

Commodities are a notorious boom-and-bust story that went big-time bust during the financial crisis. Since then, commodity producers have trimmed supply at a time when the global growth story has resumed, creating a favorable supply-and-demand picture for many commodities. Listen as panelists discuss whether we’re on the cusp of a new commodity bull market.

9:35 – 10:25 – Active ETFs: Finding the Outperformers

Actively managed ETFs remain a small but growing slice of the overall ETF pie, but that slice will continue to grow as new players—such as large mutual fund shops and other asset managers with active strategies—enter the ETF space. Find out who some of the main players are in the active space, and when active strategies make sense versus passive products.

8:45 – 9:35 – Thematic ETFs: AI, IoT, FinTech, Blockchain and more

Certain sectors are the vanguard of the 21st-century economy, and ETFs that pinpoint these sectors offer tremendous growth potential. Many thematic ETFs have performed well, but a lot of advisors still aren’t sure how they fit into client portfolios. Are they short-term tactical vehicles or long-term strategic positions? This panel examines where and how they fit into the broader asset allocation model.

3:20 – 4:10 – Portfolio Construction: By Female Advisors for Female Clients

  • Do female advisors manage money differently than their male counterparts?
  • Should portfolios for female clients be built differently since they oftentimes outlive men?
  • When constructing a portfolio, is “beating the market” less important to female clients?

In this session you will not only learn portfolio construction ideas for the forward looking market but also how to share/convey those thoughts and better understand the needs of female clients.

2:00 – 2:50 – Alternative ETFs for Rising Volatility and Rising Rates

Rising volatility and rising rates pose significant challenges for portfolio construction. Alternative ETFs may deliver broad diversification benefits—and at a lower cost—at a time when traditional assets are fully priced and “60/40” portfolios face mounting pressures. In this session, we will review how liquid alternative strategies may help mitigate a variety of portfolio risks, and how innovative alternative ETFs may provide lower-cost, tax-efficient, and user-friendly tools for diversification.

This session will include an overview of the universe of alternative ETFs, which has grown beyond leveraged and short index funds to a broad array of single and multi-strategy offerings, encompassing long/short equity, arbitrage, nontraditional bonds, global macro, currencies, commodities, and more. The session will provide in-depth insight into how alternative ETFs are designed to capture differentiated sources of risk and return, as well as key considerations for implementation.

Doug Blanton – Merit Financial Advisors

Doug Blanton is the Director of Investments at Merit Financial Advisors. Doug assists financial advisors in developing investment strategies that focus on their client’s needs. We recently sat down with Doug, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he shared his thoughts on investing in bonds in a rising rate environment.

ETF Strategy Summit: Investors have become comfortable with active fixed income ETFs and many strategists argue that they are superior to bond indexing – is there still room for passively managed bond funds in wealth management portfolios?

Doug Blanton: During this phase of the credit cycle, we prefer active fixed income to passive. As rates rise, and investors shift assets out of bonds, liquidity may become a concern. You will want nimble active managers to navigate a major spread widening or credit crunch. Credit research will also be key as we reach higher interest rates. We don’t believe credit-worthiness becomes much of an issue until 2020, however the market has a way of accelerating the pain for the most vulnerable names which we would expect active managers to recognize and limit exposure. We believe passively-managed U.S. Treasury and short-term high quality debt ETFs will make it through the next credit cycle without much consequence.

ETF Strategy Summit: With lower returns projected well into the future, should advisors re-think the proportion of assets they allocate to traditional bond strategies? Does the “balanced portfolio” need a facelift?

Doug Blanton: Our team regularly challenges the traditional balanced strategy. Bonds are historically less risky, and still offer some of the best negative correlation to extreme market or economic events. However in the absence of such events, one must consider the long-term return expectation of each asset class. The mistake we see some making today is an emphasis on value-oriented stocks and other high dividend-paying income alternatives. Most of these have a very long implied duration and will likely experience continued drawdown as rates rise. So you must choose your bond alternatives wisely to avoid the excessive interest rate sensitivity.

ETF Strategy Summit: What kind of tools does Merit use to navigate the rising rate environment?

Doug Blanton: Our process utilizes a number of economic and market indicators to assess our views on inflation and interest rates. Inflation during this expansion is being born from the expense side of the ledger, meaning higher wages and raw materials have accelerated price increase. We follow the inflation dollar to determine how much impact the consumer is likely to feel. So far, companies have been able to absorb much of the increases in part due to rising revenues and stiff competition. In addition, we believe there is a lot of data between the month-ends, so we look at how markets react to certain events or stress points no matter how small. We evaluate the behavior of our portfolios during these “mini-cycles” and adjust accordingly.

ETF Strategy Summit: Are you concerned that the use of bond ETFs as hedging tools might send investors false signals about the state of fixed income markets?

Doug Blanton: The asset inflows bond ETFs have seen during the past few years does tend to lead investors to conclusions. At the end of the day, the bond market can be a very illiquid environment. Asset flows influence investor outcomes, and those flows often get the direction and the magnitude of a particular view wrong. We don’t view asset flows as a reliable data point to determine strategy.

ETF Strategy Summit: How do you feel about hedging against inflation? Are TIPS sufficient?

Doug Blanton: The implications of higher inflation on the credit markets is one of our largest concerns. We have been steadily decreasing our interest rate sensitivity since 2015 in anticipation of rising rates. We have gone from a 5+ year duration down to 1.5 years, with 50% of our bond exposure including some floating coupon rate feature to hedge against rising rates. TIPS are a good inflation hedge in a worsening economic environment. However we find the credit alternatives offer a larger total return given the positive global economic picture. Should inflation become destructive, dampening economic growth, TIPS would be our top pick for an inflation hedge. But as of today we have very little exposure to TIPS.

ETF Strategy Summit: Thanks Doug. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Marguerita Cheng – Blue Ocean Global Wealth

Rita ChengMarguerita Cheng is the CEO at Blue Ocean Global Wealth. In 2017, she was named the #3 Most Influential Financial Advisor in the Investopedia Top 100, a Woman to Watch by InvestmentNews, and a Top 100 Minority Business Enterprise (MBE®) by the Capital Region Minority Supplier Development Council (CRMSDC). We recently sat down with Rita, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as she shared her thoughts on building portfolios for female clients.

ETF Strategy Summit: As average career, lifecycle and longevity trends among women continue to diverge from those of men, should advisors think about ETF portfolio construction differently for their female clients? How?

Rita Cheng: Lower wages, less cumulative time in the workforce, and work and pay gaps associated with exiting and re-entering the workplace mean women tend to have lower Social Security balances, reduced assets, smaller pensions and fewer opportunities to save money or contribute to their retirement plans. Longer life expectancies mean their money needs to sustain their lifestyles for longer periods of time. Financial planning is the foundation of every client relationship. ETF portfolio construction can incorporate core and satellite portfolios to provide our female clients both a strategic and tactical approach while balance their shorter- term needs for liquidity and income and longer-time requirements for growth.

ETF Strategy Summit: Clearly, the ranks of asset managers and analysts still skews towards males, even in the more progressive realm of ETF managers. Do female clients need or desire access to a broader range of female ETF managers and strategists?

Rita Cheng: According to an article published on International Women’s Day (March 8, 2018) of the Economist, investment by women and in them is growing. Women represent a growing financial force because they control most of the household spending and increasingly more wealth. The numbers speak for themselves, based on research from the Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from $34trn to $51trn. Women’s wealth also rose as a share of all private wealth, though less spectacularly, from 28% to 30%. By 2020 they are expected to hold $72trn, 32% of the total. While the gender gap among money managers persists, women are thriving in the ETF industry. For example, Women in ETFs, established in 2014, is the first women’s group for the ETF industry. It is a non-profit organization that brings together over 3,200 members, including men and women globally to advance the careers of women. The success of organizations like Women in ETFs can help increase awareness of opportunities in the ETF industry for female managers and strategists.

ETF Strategy Summit: You’ve written about the need for young people to save and invest more earlier to help stave off the retirement crisis – this advice seems most crucial to women, who live longer – does the industry need to pivot to try to serve more young people at earlier stages of their financial lives?

Rita Cheng: I think it is important for the industry to understand the distinction between financial planning advice and investment advice. Investment planning in isolation does not constitute financial planning. Financial planning helps clients understand the impact that each financial decision has on the other areas of their financial lives. Financial planning is about controlling spending, managing credit, reducing taxes, increasing savings, protecting family and assets, and building wealth for the future.

ETF Strategy Summit: With a need and/or desire for more defensive strategies among many female clients, should women be served with more tactical asset allocation than men? Is passive investing, as it is most commonly exercised with index funds and ETFs, more suited to men than women?

Rita Cheng: I think that goals-based planning integrated with portfolio management resonates well with women. Women value this work/life integration approach because it contributes to a more collaborative and meaningful relationship. The clarity and simplicity of a passive approach resonates with all clients, particularly women. Simplicity is elegant. When we provide clarity and simplicity, we can eliminate financial clutter. The goals-based planning aligns better with female clients because they adopt a more intentional approach with their wealth.

ETF Strategy Summit: While the matter is still one for debate, many polls suggest that women tend to be more risk averse than the population at large. Is it helpful for advisors to encourage female clients to be more opportunistic when it comes to risk-taking? When is it counterproductive?

Rita Cheng: In the world of investment management, winning and losing has much to do with the concept of risk.
Based on my experience, the most successful investors consider investing as an art, rather than a science. They rely on their common sense and experience. As individual investors gain more experience with investing throughout their lives, they may develop a heightened sense of confidence about their financial decisions. Experience and intuition, however, are not always reliable: they need to be constantly monitored and adjusted to ensure consistency with one’s life financial goals. I prefer to say that women are risk aware. In fact, women may appear to lack financial confidence, which can be perceived as risk averse behavior.
Women are more comfortable with taking risks only when they are reasonably sure about the chance of winning; while men seem to enjoy competing against all odds.

ETF Strategy Summit: Thanks Rita. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Carl Choy – CKW Financial Group

Carl Choy is a Principal at CKW Financial Group. His focus is on asset allocation, estate planning and client strategies. We recently spoke with Carl, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he shared his thoughts on tactical strategies.

ETF Strategy Summit: What trends should inform the selection of tactical ETFs in the current environment?

Carl Choy: As a dynamic strategist (1 to 3 year tactical positions versus bench) CKW uses industry consensus information regarding economic trends and factors as potential predictive indicators of future investment revenue and earnings. Many market trends are the behavioral finance conclusions of humans using our pattern recognition expertise and the confidence we are right. Predicting the degree, duration, relevance and persistence of both trends are important to all portfolios. CKW’s current economic beliefs are: GDP growth will be higher over next 5 years for almost every major economy in the world. Corporate earnings of investable daily liquid companies will continue to grow faster relative to fixed income yields as they increase, the interest rate rise of the 10 year treasury will not rise higher than the S&P 500 E/P (but we hope it will by P/E’s going higher as rates remain relatively low), the current E/P of equity is good relative to the E/P of fixed income. Therefore, we are overweight equity. Market Trends conclusions: short term volatility will increase but is too expensive to hedge at this time. Increasing exposure to sector (commodity, energy, gold etc) increases concentration and probability of having a different result we are unwilling to take at this time. CKW currently has no intentional overweight to any sector or traditional factor. We have an overweight to Japan and Europe to underweight Australia in EAFE. Due to demographics, rising rates, consumer behavioral change we are underweight space (real estate). Amazon, working from anywhere, self driving cars, AI, and us old people with large houses full of stuff our kids don’t want and we don’t need all reduce the need for space. Rising rates will make space less affordable too. We characterize space as a market that will rust (maintenance, repairs, general cost of ownership) not bust. The government noise will get louder, increasing volatility due to less certainty as the midterm elections get closer. Once the midterms are over, uncertainty will go down and hopefully increase confidence. We are hopeful that the 30+ percent increase in consensus earnings over the next few years vs 2017 will at least hold the market at current levels and believe at some point in time the price of daily liquid stocks follow earnings.

ETF Strategy Summit: If advisors use tactical ETF strategies as satellites to a core holding, how big do the allocations need to be to be effective?

Carl Choy: As always it depends on what you are trying to accomplish. In general, the position size needs to have a better risk to reward trade off than what will be underweighted. CKW believes in a Global dynamic core. Global Stocks (G/V, cap, region), Global bonds (rates, credit, duration, region). Remember when modeling that adding a satellite also underweights what it replaced. This may double the SD if the satellite does not work.

ETF Strategy Summit: How does CKW Financial Group think about tactical ETF positioning using a blend of active and passive strategies?

Carl Choy: CKW believes asset allocation can add value, net of fees over time. Ultimately the responsibility of passive or active manager selection as it relates to performance is the asset allocators. The distinguishing feature of our strategy is to first play dynamic defense by isolating and underweighting asset classes that we believe have low probability of the risk to return characteristics used in traditional models. If we do not have a reason to use active we will use passive.

ETF Strategy Summit: Many advisors have struggled with how to approach fixed income as rates are rising and debts, public and private, have surged – is it possible today to derive sufficient downside protection from fixed income while still generating income for wealth management clients?

Carl Choy: People and Institutions live on cash flow not income. CKW uses the total return approach. CKW is a Global Balanced Dynamic Strategist because wealthy individuals and institutions have a long term balanced mandate. CKW like many of you have underweighted rates and overweighed credit and equity. The downside volatility of rates at the long end of the government curve could be as much as equity downside volatility with little upside probability. The additional equity over time should compensate for lack of government fixed income returns vs 3 to 5 year risk, is our view.

ETF Strategy Summit: With volatility returning despite many positive signs for the economy and the bull market, is it a good time to focus on tactical strategies for risk management?

Carl Choy: CKW invest in daily liquid assets where volatility is the norm. Hedging short term volatility is too expensive at this time. Matching volatility time horizon with client emotional time horizon (how long until they give up on you) will allow the client to hear the same thing many times and stay for the long run. Current data suggest that individuals and corporations globally are better financially. The financially challenged are governments. Governments are struggling to find revenue versus the expenses they create. The noise from this struggle will move markets depending on the volume and duration of the government noise. S&P earnings consensus of 30%+ over the next few years support an overweight to equity. If the market trades at a E/P of 5% (P/E = 20) relative to the 10 year treasury 3-4%, find a bullish strategist. If the price of the market does not follow earnings up (too much noise) the E/P will be ~7% without dividends (P/E = 14 to 15), hide. At some point the $12.5 trillion sitting in cash held by rational investors will be invested. An allocation to stuff, stocks, bonds, real estate, crypto, or tulip bulbs will happen (don’t know when). CKW’s discipline to a global balanced approach to investing in daily liquid assets with earnings and revenue is what clients were taught by our industry. They do not understand fancy math. Keep a simple, low cost, institutional-quality asset allocation process your client can understand and they will stick with you.

ETF Strategy Summit: Thanks Carl. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Fed Turns Hawkish: ETF Areas to Win

June 14, 2018
As widely expected, the Fed effected the second-rate hike of the year in its June meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 1.75-2.00%. So should you adjust your portfolio based on the latest Fed activity and guidance?

Steven Cucchiaro – 3EDGE Asset Management

Steven CucchiaroStephen Cucchiaro is the President & CIO at 3EDGE Asset Management. He has become known for his use of proprietary investment research methods including the application of concepts from engineering, system dynamics, complexity economics and multi-player game theory to analyze the global capital markets. We recently spoke with Stephen, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he shared his thoughts on geopolitical risks, fixed income liquidity and risk management.

ETF Strategy Summit: Does the world need any more ETFs? Are we at “peak” ETF?

Stephen Cucchiaro: As is oftentimes the case with successful investment products such as ETFs, the market has gone from a cottage industry to a relative behemoth in a fairly short period of time. However, ETF assets are still a relatively small percentage when one considers the total size of the global capital markets. Even with the dramatic growth of the ETF market, we do not believe that we have seen the last of rapid growth phase of the ETF industry for a while. For better or for worse, we do not believe that we have reached peak ETFs.

ETF Strategy Summit: Are you employing active ETFs in your strategies, and if so, how are you selecting ETF managers?

Stephen Cucchiaro: At 3EDGE Asset Management we act as a discretionary investment manager. We construct multi-asset investment portfolios primarily through the use of index ETFs. We invest across asset classes including; equities, fixed income, real assets – commodities and gold, as well as cash and currencies. We also invest across geographies including the U.S., Europe, Asia, Far-East and emerging and frontier markets. For the vast majority of our positions we invest through passive, index ETF vehicles. From time to time we may utilize an active ETF vehicle but those cases would be the exception. We manage portfolios internally on a discretionary basis and do not use other ETF managers.

ETF Strategy Summit: Which geopolitical risks might cause a black swan event over the next 12 months?

Stephen Cucchiaro: Tariffs and Trade Wars: Similar to other types of wars, trades wars may start out as fairly benign tit-for-tat exchanges used as negotiating tools for the countries involved. However, similar to actual wars they can at some point take on a life of their own and spiral out of control and become full-fledged trade wars. If this is the result of the Trump administration’s initial tariff policies, then that could certainly become a serious headwind for the global economy and the capital markets.

Italy – There is the potential for nationalism and the anti-globalists to solidify their anti-EU position in the upcoming fall elections, which could turn the election into more of a referendum on Italy remaining in the EU. Should Italy decide to exit the EU, the effects could be worse than Brexit because at least in the case of Brexit the UK maintained their own currency, which could act as a buffer in terms of the effects of Britain leaving the EU. This is not the case with Italy since it is bound to the Euro. Therefore, should Italy decide to exit the EU, it could well be the end of the European Union, at least in its current form.
ETF Strategy Summit: 3EDGE has raised concern about the number of products and strategies tied to LIBOR in the face of what could be an inflationary period moving forward – does this concern carry over to the ETF universe?

Stephen Cucchiaro: Perhaps not specific to Libor, but in the area of fixed income ETFs, we are always concerned and would urge caution whenever investors hold certain types of fixed income ETF vehicles. The reason is that particularly in certain areas of the fixed income markets there simply isn’t the same kind of liquidity available as there is in government securities or in the equity markets. Therefore, investors may be holding certain types of fixed income ETF vehicles that they believe to be highly liquid, however the actual underlying bonds that may make up the ETF may be less liquid than the ETF itself. Of course, under normal market conditions these fixed income ETFs trade without any problems, however, the problem could arise should there be some form of market disruption that triggers a sell-off in the bond market. At that point the perceived liquidity of some of the more esoteric fixed income ETF vehicles may not be available since the liquidity of the underlying fixed income securities themselves may not be present.

ETF Strategy Summit: How do you position a portfolio defensively using ETFs?

Stephen Cucchiaro: At 3EDGE Asset Management our goal is to generate attractive risk-adjusted returns over full market cycles. The foundation of our approach to risk management is our capacity to construct portfolios that are well diversified across both asset classes and geographies and the growth of the ETF market has provided us with more options in terms of portfolio construction. A typical 3EDGE portfolio will hold some amount of equities, fixed income, real assets (gold and commodities), as well as cash and currencies. Through our proprietary research model of the global capital markets we will dynamically adjust the allocation to the seven major asset groups that we model depending on our market outlook. If our model research should indicate that it is appropriate to be more defensive then we would reduce our allocations to equities and redeploy those assets to fixed income, real assets or cash depending on the reasons that our research models may have become more defensive.

ETF Strategy Summit: Thanks Stephen. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

John Davi – Astoria Portfolio Advisors

John DaviJohn Davi is the Founder & CIO at Astoria Portfolio Advisors. The firm specializes in construction, management and subadvising of ETF model portfolios. We recently spoke with John, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he provided his thoughts on having a diversified approach to factor investing.

ETF Strategy Summit: What are the advantages to using a multi factor or factor-cycling product versus implementing single-factor ETFs in portfolios?

John Davi: The evidence suggests that higher risk adjusted returns are available if one were to invest in a set of factors that are robust, persistent, pervasive, intuitive, implementable, etc. compared to a single factor strategy. This is a large reason why Astoria invests in a diversified portfolio of factors not only across equities but across asset classes. I don’t know (and I doubt many others would know) when a particular factor will go in or out of style. The data suggests that some factors can be in and out of favor for decades. Astoria prefers a diversified approach to factor investing.

ETF Strategy Summit: Factor investing mavens often warn that it’s impossible or incredibly difficult to time factors – are they right?

John Davi: There is no evidence to suggest that you can time factors in such a way that is systematic, repeatable, and profitable across varying time periods. Do people try anyways? Of course, people are human and will try anything even if the odds are stacked against them. Do some people profit from factor timing? Anything is possible. But the key is can you do it systematically, repeatably, and in a scaled fashion? Astoria believes (which aligns with the actual evidence) that it’s significantly more important to pick a set of factors which are robust, pervasive, repeatable, explainable, implementable AND to invest in them for the long run. The bottom line is that investors should pick factors that have strong evidence, harvest them in a cost-effective manor, and stick with them for the long run – this gives you a higher probability to achieve attractive risk adjusted returns rather than trying to time factors. Moreover, I need to make an important point. Unfortunately, the investment management industry has become enamored with short duration capital. I don’t know too many strategies (if there are any at all) that have a high probability of making money in a systematic, repeatable, and scalable format with short duration capital.

ETF Strategy Summit: What are the advantages to actively managing factor exposures?

John Davi: People will always justify some rationale for doing what they do. How many people do you know that can time the market in a repeatable, systematic, and scalable format? Not many. If market timing is difficult, why on earth would you think you can time factors?

ETF Strategy Summit: What are the implications for interest rate increases and monetary tightening for factors widely available in ETFs?

John Davi: The repercussions of monetary tightening are quite significant, especially on the margin, and has enormous portfolio implications. Nobody is prepared for an aggressive fed rate cycle or a cycle with liquidity declining on the margin. People have plowed $2.5 trillion into bond funds since 2009 and I have yet to see any meaningful outflows. Keep in mind that aside from the Fed implementing QT and hiking rates, liquidity will further decline due to the ECB curtailing their QE program and eventually the BOJ will follow suit. My point is that we are entering a new cycle of less liquidity and liquidity is what ultimately drives markets. This year financial conditions have tightened significantly, and we believe this is a primary reason why the S&P 500 couldn’t sustain a more meaningful rally despite the blow off the top earnings in Q1. Stocks and bonds are positively correlated, people are underweight alternatives, and cash is an asset class that nobody wanted to own during the past decade. The bottom line in our view is that portfolios are not prepared for this transition period. A meaningful change in the liquidity cycle will likely revert in meaningful price action across factors. Astoria believes that the overarching theme in one’s portfolio should be value, quality, and mixing in other factors (Astoria likes momentum, carry, trend) to further enhance your portfolio risk characteristics.

ETF Strategy Summit: Where has the “value” factor gone – are there ETFs still delivering strong returns using value?

John Davi: The value factor has been out of favor – just like it has many times throughout history – as investors have been enamored with growth and momentum stocks. Astoria believes that investors should allocate now towards value & quality (along with the various other risk premiums we are harvesting) and avoid growth as the market transitions to this new liquidity cycle. We simply think there is a greater margin of safety in value stocks while growth is crowded with a high degree of vulnerability as this liquidity transition period picks up pace.

Be careful with how you pick your factor ETFs. Investors need to run bottom up screens to ensure they are getting the desired exposure they want. Most value ETFs have extremely low active share. In a previous life, we would work with institutional investors to construct optimized long/short baskets to purely isolate a factor exposure. There is a long/short Value ETF (CHEP) but it never got any significant traction. QVAL and IVAL are 2 long only value ETFs that provide meaningful active share. We use the latter for our international value exposure.

ETF Strategy Summit: Thanks John. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Lorraine Ell – Better Money Decisions

Lorraine EliLorraine Ell is the CEO at Better Money Decisions. Author of the book, Bozos, Monsters and Whiz-bangs: Bad advice From Financial Advisorsand How to Avoid it!, Lorraine is also frequently quoted in MarketWatch, Investment News, Investor’s Business Daily, Yahoo Finance, and The Wall Street Journal. We recently spoke with Lorraine, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as she gave us some insight on building portfolios which address clients’ needs and concerns.

ETF Strategy Summit: As average career, lifecycle and longevity trends among women continue to diverge from those of men, should advisors think about ETF portfolio construction differently for their female clients? How?

Lorraine Ell: The current statistic is that 80% of those living into their 90s are women. Longevity considerations are therefore more important when constructing a portfolio that must be capable of providing income for women well into their 90s. ETFs because of their low internal expense ratios are an ideal vehicle to improve investment returns over a long period of time. Longevity also increases the importance of a portfolio keeping up with inflation. An allocation that is too conservative may not work in the long run.

ETF Strategy Summit: Clearly, the ranks of asset managers and analysts still skews towards males, even in the more progressive realm of ETF managers. Do female clients need or desire access to a broader range of female ETF managers and strategists?

Lorraine Ell: Women do not necessarily care about the person managing the fund. In fact, a client’s relationship is with the advisor, and clients generally have no interest in the individual managers at fund companies. Having said that, the industry has an image problem; numerous studies have demonstrated that female fund managers do just as well as male fund managers but still make up only 10% of the group. And that has persisted for years despite an increased representation of women in other professions: 37% of doctors, 33% of lawyers and 63% of accountants. Some of this may be a result of the lack of interest on the part of females to become portfolio managers but also there is a reluctance to hire women.

ETF Strategy Summit: Women investors and impact, sustainable, SRI and ESG investing are often mentioned in the same breath, so much so that it’s nearly become cliché – in your experience, is there a greater desire to do well by doing good among your female clients?

Lorraine Ell: Yes. More women than men come to my firm requesting sustainable/SRI/ESG investment vehicles. We do caution women that they need to “sustain” themselves first in making investment decisions but the increasing prevalence of sustainable options is making it easier to comply with their request.

ETF Strategy Summit: As a practitioner of sustainable investing, how do you typically approach the subject with female clients – do you take a values-based approach, a risk-awareness approach, or some other tactic?

Lorraine Ell: We start every client relationship with a comprehensive financial plan and then construct a portfolio to meet the needs and goals outlined in the plan. If requested, we use whatever sustainable funds and ETFs available to meet both the client’s concerns but most importantly the client’s needs. Sustaining the client is first and foremost.

ETF Strategy Summit: To what extent do you think the differences between male and female clients is an outgrowth of our culture, and what other attributes might explain the differences?

Lorraine Ell: The cultural perception that still exists in the U.S. today is that men are better at managing money than women even though the data does not support this idea. But there is a pervasive collective consciousness surrounding the belief that men are better at math than women. A “gender-equality paradox” has been noted in that there are more women in STEM in countries with lower gender equality. Women make up 40 percent of engineering majors in Jordan, for example, but only 19 percent in the U.S.
Sadly, there is still a stereotype that women make decisions emotionally and men technically, yet personal finance is emotional – for both men and women! The emotional aspect of a change in financial circumstance is far more impactful than the actual material loss. Our minds function to remember the negative more intensely than we remember the positive events in our lives which explains the reason the market crash of 2008-2009 is still so front-of-mind for most clients.

For the most part, clients, both male and female want to know that they will be okay throughout retirement and to the end of their lives. That is the biggest concern for all clients.

ETF Strategy Summit: Thanks Lorraine. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Luke King – Main Management

Luke KingLuke King serves as Managing Director at Main Management. His focus is on trading and business development. We recently spoke with Luke, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he discusses actively managed ETFs and sector rotation.

ETF Strategy Summit: Does the world need any more ETFs? Are we at “peak” ETF?

Luke King: New ETFs bring innovation, competition, and cost savings to the investing public. We view new ETFs and new ETF issuers coming to market as a positive and believe we will continue to see innovation in the ETF space particularly in the area of actively managed ETFs.

ETF Strategy Summit: Are you employing active ETFs in your strategies, and if so, how are you selecting ETF managers?

Luke King: Yes, we employ actively managed ETFs within our investment strategies. We utilize our own actively managed sector rotation ETF as a key holding within some of our investment strategies. In addition, we utilize actively managed ETFs of other ETF issuers with a focus on actively managed fixed income ETFs. When it comes to selecting ETF managers we look at the team, process, track record, and cost in seeking to identify best in breed providers.

ETF Strategy Summit: Can you explain how Main Management meaningfully blends active and passive management through sector rotation?

Luke King: Main Management’s approach seeks out the best aspects of active and passive management by focusing on generating alpha while managing risk and controlling costs. Our sector rotation strategy employs a quantitative and qualitative approach to identify market sectors, sub sectors, and industry groups which appear to be undervalued and have a positive catalyst present which may propel them to revert back to a more appropriate valuation. The strategy is implemented with exchange traded funds and has a GIPS verified track record going back to 2002.

ETF Strategy Summit: How does the sector rotation strategy respond to the kind of volatility we saw earlier this year? What about the global financial crisis?

Luke King: The sector rotation strategy is an equity based strategy so it is not immune from market volatility. However, we do have three tools that have helped us successfully navigate the market volatility experienced in February of this year as well as during the global financial crisis. The first tool is to be able to go up to 20% cash which may help cushion the downside and provide us with money to opportunistically put to work. The second tool involves rotating into more defensive sectors. Defensive sectors may help cushion the downside during times of increased volatility. The last tool available to us is the use of covered call options on a portion of the portfolio to potentially further reduce portfolio volatility. These three tools have helped us successfully navigate periods of market volatility in the past and we believe will continue to do so in the future.

ETF Strategy Summit: Are you concerned that certain sectors may be prone to disruption and long-term multiple compression in the future?

Luke King: We are always on the outlook for sectors/industries that have been disrupted, but who’s price has discounted the disruption. Consumer Staples have experienced the “Amazonization” and have lost their pricing power for branded goods. As technology driven continues to occur we expect to see continued disruption across multiple sectors.

ETF Strategy Summit: Thanks Luke. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

Inflation Fears Push Investors Into TIPS ETFs

June 11, 2018
Retail investors aren’t waiting to see the full whites of inflation’s eyes. Rather, they’re running at a record pace into securities that hedge against risks of rising price pressures as the U.S. Labor Department is set to give its latest reading on consumer prices Tuesday.

Rick Lake – Lake Partners

Rick LakeRick Lake is the Co-Founder & Co-Chairman at Lake Partners. He oversees the firm’s research on mutual funds and ETFs that utilize alternative strategies, and helps direct the company’s team effort in asset allocation, investment research, and multi-manager investment programs. We recently sat down with Rick, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he walked us through the different alternative strategies available.

ETF Strategy Summit: What explains the growing interest in alternative ETFs?

Rick Lake: Rising rates and rising volatility present new challenges for portfolio construction, risk management, and diversification. Major forces are reversing the market dynamics of the recent past:

  • The Fed is raising rates
  • Global central banks have begun to tighten and to reduce balance sheets
  • U.S. debt issuance is rising
  • Inflation is accelerating

Stocks and bonds are becoming correlated—which undermines traditional “60/40” asset allocation. Select liquid alternative strategies may serve as tools to help reduce risk and improve portfolio diversification. These potentially diversifying strategies are now available as lower-cost, user-friendly ETFs, many of which are also tax-efficient.

ETF Strategy Summit: How has the universe of alternative ETFs evolved?

Rick Lake: The universe of alternative ETFs includes a broad range of alternative strategies and assets. Long/short equity, option writing, non-traditional bonds, arbitrage, global macro, and managed futures are alternative strategies now available via ETFs. Commodities, currencies, and volatility are the primary alternative assets available as ETFs. Alternative ETFs have come a long way from leveraged and short index funds. As innovation continues and investor demand grows, the universe of alternative ETFs should expand, and provide additional sources of return and more tools for risk management.

ETF Strategy Summit: How are alternative ETFs different from alternative mutual funds or hedge funds?

Rick Lake: Alternative ETFs represent the latest trend in the “Democratization of Risk Management.” Their costs to investors can be significantly lower than alternative mutual funds or hedge funds. We have constructed diversified portfolios of alternative ETFs where the underlying funds have average expense ratios of approximately 55 to 60 bps—significantly lower than the “2% and 20% plus expenses” structure of the classic hedge fund or the average weighted expense ratio of approximately 1.9% for the largest Morningstar Categories of alternative mutual funds. The trade-off is the narrower range of alternative strategies currently available in the ETF format.
Another difference is the type of strategies in each structure. The investor protection requirements of the ’40 Act limit the use of leverage and illiquid securities in registered, daily liquid funds. Also, alternative ETFs tend to focus on rules-based approaches, although index-oriented and active approaches are also available. Over time, investors and managers will seek to match the strategy with the most appropriate delivery vehicle.

ETF Strategy Summit: How much should advisors allocate to alternatives or alternative ETFs?

Rick Lake: Speaking with advisors around the country, many have concluded that a minimum 10% allocation is required to have an impact. Depending on the investment experience of clients and the size of the client portfolios, we have seen advisors implement allocations to alternatives of 20%, 30% or more. The allocations are based on risk/return targets, and how alternatives are utilized to complement traditional assets. A diversified approach to implementation is preferred, due to the idiosyncratic nature of the underlying alternative funds and strategies. Many advisors will tap multialternative funds or SMAs, seeking specialist managers to help oversee the process.

ETF Strategy Summit: What should advisors and investors be mindful of in alternative ETFs?

Rick Lake: Speculators trading VIX products during the market break of February rediscovered that less volatile approaches may be prudent. Careful analysis of alternative investments is required to understand the risks and the potential nature of the return stream. Enlisting outside experts dedicated to the sector may be worthwhile. Using such a resource may help enhance results or provide advisors with more time to focus on client service.

ETF Strategy Summit: Thanks Rick. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.