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What makes Fidelity Total Bond unique to has beaten the Bloomberg Barclays US Aggregate Bond Index by one percentage point annually over the past 10 years?
Good article on some stars in the shadows, so to speak. One caveat on several of the etf's Lewis mentions is lack of volume; they're thinly traded and at times will have significant bid-ask spreads. Thin volume can require a lot of time and effort (and sometimes, cost of multiple trades) to build a reasonable position, and it can be tough to reduce or exit a position at a reasonable price if you need/want to.
I'd guess the volume factor is a big reason investors tend to stick with well-known index etf's. It certainly is in my case.
"Barron’s made a qualitative assessment of these ETFs to find some good ones."
It would be interesting to know what "qualities" Barron's considered because claiming their good without giving anyone the ability to know whether the criteria match up with their circumstances or beliefs doesn't help much.
Agree on trading volume consideration, especially in days like today. The Vanguard ETFs are posted only on their institutional investors site, strange.
@LLJB The qualities are pretty much in the story already. One was managing successful parallel or similar mutual fund products for longer periods of time. Another was fees--are they lower than comparable active products or even lower than comparable passive ones? A third was already having a good performance record as an ETF. Since some of these ETFs are newer, it is necessary to make such qualitative assessments.
@Sven Regarding volume and bid-ask spreads, I would make two points. One is that many retail investors who aren't trading like wildfire should be able to get decent bid-ask spreads and pricing on these ETFs. It is institutional investors and advisers who seek to buy a lot of shares who may struggle initially with smaller ETFs and potential market impact costs. Another is I highly doubt some of these new ETFs will stay small for long. The new Vanguard ETF for instance is being earmarked specifically to be sold by Vanguard's 500 plus adviser network. I expect it will have plenty of assets and liquidity soon. Nor do I think a $300 million plus ETF like Fidelity's is very difficult to trade.
I have been invested with Vanguard Global Min Volatility fund since inception. Performance has been solid but lagged a bit last year and that is okay. Through the volatile ups and downs this year, this fund held up well especially in down cycles.
Their investment process was described in details in David Snowball's earlier commentary in 2015 (I think??). As of March this year, Vanguard launched six factor-based and actively managed ETFs and they are ran by the same quantitive group who run a number of quad funds. I am leaning toward their multifactor ETF that invest in all-caps rather than limited to large caps.
I don't understand CAPE well enough, but I invest a small position in DoubleLine Cape Shiller which has done well so far.
Also there are considerable discussion on this topic on Bogleheads site. What I am interested is the implementation of them to replace several actively managed MFs I have.
Regarding the new Vanguard mutual fund versus the ETF, I would disagree with the Morningstar author's recommendation to choose the mutual fund unless you are investing directly with Vanguard as your broker. The reason for that is the same as what I stated regarding the Fidelity ETF vs the Fidelity mutual fund. Transaction fees at non-Vanguard brokers are much higher for Vanguard mutual funds than Vanguard ETFs. At Vanguard's brokerage you can buy the mutual fund without a transaction fee so there it is worth it. For those worried about wide bid-ask spreads or low volumes I would recommend placing limit orders on all purchases and sales so you don't get punished by the spread. Or, if it concerns you that much, wait till there's more liquidity.
Regarding CAPE, I think it's an interesting metric and certainly funds and ETFs based on it have worked recently. But I think the value of any one metric is often limited. Even if it works, other investors often step in to use that metric and the return premium for using it disappears and sometimes turns negative until it starts working again. That's why having the ability to use more than one metric can be advantageous. Rules based systems in the market tend to work until they don't. The trade becomes crowded so to speak and the return premium for that system gets arbitraged away and people leave it.
I figured as much but my response to the particular ETN versus the metric it is based on would largely be the same. It's doing fabulously right now no question. My point is I don't think it will always be doing fabulously, that the trade will eventually become crowded on this double rule strategy--CAPE plus price momentum. One other note about ETNs, they have credit risk because they're not conventional ETFs. This is an old but decent article on the ETN: etf.com/sections/blog/20177-inside-professor-shillers-cape-etn.html
So you are thinking CAPE's very low UI, same as SPLV, is misleading ?
I remember this Britt article well, written one year in. Hard for me to tell, then or now, whether it is really saying anything substantial. (I am very surprised you cite it as 'decent.') The Circumstance subsection is meatless now. I wonder if Britt feels the same at year 5.5. The Faber article referred to makes me hope DLEUX will not continue to be such a laggard. Can't get to the Siegel FT piece. The Design subsection remains interesting a little but chiefly in a 'because I say so' vein. I wonder why he failed to mention the monthly rebalancing. http://www.etf.com/CAPE appears to draw on this ancient blurb, as it mentions delisting risk. Do you think delisting is a risk?
The structural aspect he describes is interesting too. I would say you are better off with the Doubleline mf for the CAPE exposure than an ETN with a single issuer's--in this case Barclays'--credit risk. Or, and I know I've mentioned this before, do it yourself. It doesn't seem a particularly hard strategy to mimic on your own with three or four ETFs.
Regarding the UI, I would say on a rules-based strategy not designed to specifically have a low downside risk profile that the UI in recent years would be highly misleading. Even in the case of SPLV which is designed to be low vol there are hidden risks, a concentration now in utilities that doesn't do so well in certain environments such as rising rate ones.
But the CAPE ETN really isn't designed in any way to be defensive as far as I can tell, especially with high sector concentrations as it has. I would say the low UI in this case would be more accidental than real. I would trust an active manager in this case who specifically says he/she is striving for low downside risk and proves it over time over a rules-based ETN with no specific downside risk feature built into the rules. You could say price momentum has some downside risk feature I guess in the rules here--for what its worth. But being in just three or four low value sectors at a time isn't really risk averse. The value premium isn't known to come necessarily with low volatility. It does tend to work over time, but you have to accept some ulcers in that UI often to get the excess returns.
Thanks. I guess some might argue that auto-churn to lower valuation holdings is the specific defensive design, kind of by definition. Point taken about value premium. And right, it is not risk-averse as commonly understood. (Are the many long-lived-div etfs risk-averse? Other inputs? --- QUAL, NOBL, DGRW, OUSA, and such?)
I hate to say this, but it depends. I've noticed there are different kinds of bear markets and depending on what factor is driving the bear will determine what turns out to be a winning downside risk strategy. For instance, 2008 was a credit driven bear market/recession in which low quality cyclical companies suffered the most. Value funds tend to like those companies by default as they tend to be the cheapest ones in the market. Value strategies did very poorly in 2008 while some of the quality dividend growth strategy ETFs you mentioned would've held up far better. However, 2000-2002's bear market was quite the opposite--a valuation driven bear market--in which cheap low quality companies actually did much better than high priced blue chip marquee names. The real question to ask is which kind of bear do you think we will enter next and what might perform well in that kind of environment?
Right; this text of yours could be lifted from (or used for) a promo for the somewhat unloved TWEIX, which did not observe the 'oppositeness' of the conditions either time (unlike, say, VIVAX). Davidson has been nominated for lots of awards, I see. I also see that over long stretches of the last decade it lags. It really shone 00-02.
@LewisBraham, you brought back challenging times. Certainly learned my lessons in both bear markets. Most important thing was not to sell in those period and remind myself that investment is for the long term. Several years later everything recovered and more. High quality bonds held up well and periodic rebalancing really helped.
Not sure what the triggering points for the next bear market will be. But I will stick to my plan.
@davismoran, I did not research CAPE on bodgeheads site. Many of the posters are Vanguard and DFA diehards.
One fund that is a fascinating example of the disparity between the two previous bear markets is the deep value fund AVALX. It did great in the first 2000-02 bear market and terrible in the 2008 one. What is really interesting to me right now is it is doing really well in this year's slide so far. When the market tanks it seems to go down much less. I'm wondering if that isn't some kind of indicator as to what types of stocks might suffer and thrive the most if we continue down the same path, or is it just a head fake? It is by no means what one would call a risk averse fund. That is part of the fascination. I also wonder if conventional value stocks that smart beta products have been chasing for years now might not do as well as deep value ones which are more unusual and often not found in most benchmarks. I wonder for instance if benchmarks themselves and the passion for indexing and ETFs itself might have something to do with the nature of the next crash. All of this is just theory right now on my part. Unfortunately, most bear markets aren't often fully understood till you're in the middle of them, and sometimes not even then.
I followed AVALX portfolio for awhile. It tends to hold large slug of cash in excess of 40%. Sometime cash goes up even higher. I tend to follow asset allocation funds with flexible mandates. One example is PRWCX that would let the cash builds until it finds the "right" opportunities. Right now the cash is down to single digits from close to 20% last year. Recent interview revealed his investment in dull but predictable utility stocks. So I think he is getting defensive. On the equity side he showed very good timing even with Amazon stock.
One risk I envision is how a full blown trade war may impact earnings on large caps which have global exposure. That will takes several quarters to see the full impact in S&P 500 index. It could spread to other indexes as well. History taught us that 1930's protectionism had contributed to if not prolonged the Depression. Without a crystal ball I will my build cash position patiently.
Comments
I'd guess the volume factor is a big reason investors tend to stick with well-known index etf's. It certainly is in my case.
It would be interesting to know what "qualities" Barron's considered because claiming their good without giving anyone the ability to know whether the criteria match up with their circumstances or beliefs doesn't help much.
@Sven Regarding volume and bid-ask spreads, I would make two points. One is that many retail investors who aren't trading like wildfire should be able to get decent bid-ask spreads and pricing on these ETFs. It is institutional investors and advisers who seek to buy a lot of shares who may struggle initially with smaller ETFs and potential market impact costs. Another is I highly doubt some of these new ETFs will stay small for long. The new Vanguard ETF for instance is being earmarked specifically to be sold by Vanguard's 500 plus adviser network. I expect it will have plenty of assets and liquidity soon. Nor do I think a $300 million plus ETF like Fidelity's is very difficult to trade.
Their investment process was described in details in David Snowball's earlier commentary in 2015 (I think??). As of March this year, Vanguard launched six factor-based and actively managed ETFs and they are ran by the same quantitive group who run a number of quad funds. I am leaning toward their multifactor ETF that invest in all-caps rather than limited to large caps.
I don't understand CAPE well enough, but I invest a small position in DoubleLine Cape Shiller which has done well so far.
Regarding CAPE, I think it's an interesting metric and certainly funds and ETFs based on it have worked recently. But I think the value of any one metric is often limited. Even if it works, other investors often step in to use that metric and the return premium for using it disappears and sometimes turns negative until it starts working again. That's why having the ability to use more than one metric can be advantageous. Rules based systems in the market tend to work until they don't. The trade becomes crowded so to speak and the return premium for that system gets arbitraged away and people leave it.
I remember this Britt article well, written one year in. Hard for me to tell, then or now, whether it is really saying anything substantial. (I am very surprised you cite it as 'decent.') The Circumstance subsection is meatless now. I wonder if Britt feels the same at year 5.5. The Faber article referred to makes me hope DLEUX will not continue to be such a laggard. Can't get to the Siegel FT piece. The Design subsection remains interesting a little but chiefly in a 'because I say so' vein. I wonder why he failed to mention the monthly rebalancing.
http://www.etf.com/CAPE appears to draw on this ancient blurb, as it mentions delisting risk. Do you think delisting is a risk?
Regarding the UI, I would say on a rules-based strategy not designed to specifically have a low downside risk profile that the UI in recent years would be highly misleading. Even in the case of SPLV which is designed to be low vol there are hidden risks, a concentration now in utilities that doesn't do so well in certain environments such as rising rate ones.
But the CAPE ETN really isn't designed in any way to be defensive as far as I can tell, especially with high sector concentrations as it has. I would say the low UI in this case would be more accidental than real. I would trust an active manager in this case who specifically says he/she is striving for low downside risk and proves it over time over a rules-based ETN with no specific downside risk feature built into the rules. You could say price momentum has some downside risk feature I guess in the rules here--for what its worth. But being in just three or four low value sectors at a time isn't really risk averse. The value premium isn't known to come necessarily with low volatility. It does tend to work over time, but you have to accept some ulcers in that UI often to get the excess returns.
Not sure what the triggering points for the next bear market will be. But I will stick to my plan.
@davismoran, I did not research CAPE on bodgeheads site. Many of the posters are Vanguard and DFA diehards.
One risk I envision is how a full blown trade war may impact earnings on large caps which have global exposure. That will takes several quarters to see the full impact in S&P 500 index. It could spread to other indexes as well. History taught us that 1930's protectionism had contributed to if not prolonged the Depression. Without a crystal ball I will my build cash position patiently.