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Mar 3, 2007 7:38 pm

I have only been in the biz for a year and have some questions about
etf's.  A client wants them for his SIMPLE (which will be
self-directed) and I am not sure how they will be better for him. 
I assumed ETF's were more for people looking to be "active" traders,
which I really am not looking for right now as an advisor.  I know
some (admittedly not much) about ETF's, but any info concerning them
and their appropriateness in this case would be appreciated.

Mar 3, 2007 8:10 pm

check out

www.etfconnect.com

www.holdrs.com

for more info

Mar 3, 2007 8:56 pm

Sure they can be appropriate in a SIMPLE.


Many argue that they are the best way to invest hands down.

Mar 4, 2007 10:19 am

thanks.  I will check out those sites.

Mar 4, 2007 9:01 pm

ETF's were not originally created for being actively traded.  That happened because of the low transaction costs affiliated with them.  

Mar 5, 2007 6:16 am
theironhorse:

I assumed ETF's were more for people looking to be "active" traders,
which I really am not looking for right now as an advisor.  I know
some (admittedly not much) about ETF's, but any info concerning them
and their appropriateness in this case would be appreciated.





An ETF is simply and index mutual fund you can trade all day long, if you like. Don't confuse tools with method.



If he wants an ETF portfolio for his IRA, then pick out some stock indexes you like and the same for bond indexes.



Here's something simple to start with.



1/3rd VTI (MSCI US Broad Market)

1/3rd CWI (MSCI All-Country xUS)

1/3rd AGG (Lehman Aggregate)



Unless you travel to distant planets you would be hard pressed to beat this portfolio.


Mar 5, 2007 11:25 am

One of the biggest benefits of ETF's are their tax-efficiency. That's not going to matter inside the SIMPLE. Most are still a lot cheaper that the corresponding MFD, and since they're indexes there's not nearly as much tracking error as MFD's.


You need to decide if your investing philosophy will be served by ETF's, i.e. Active stock pickers vs. passive asset allocation.

Mar 8, 2007 11:12 am

Anyone here using WisdomTree ETFs?

Mar 8, 2007 12:24 pm
AllREIT:
theironhorse:

I assumed ETF's were more for people looking to be "active" traders, which I really am not looking for right now as an advisor.  I know some (admittedly not much) about ETF's, but any info concerning them and their appropriateness in this case would be appreciated.



An ETF is simply and index mutual fund you can trade all day long, if you like. Don't confuse tools with method.

If he wants an ETF portfolio for his IRA, then pick out some stock indexes you like and the same for bond indexes.

Here's something simple to start with.

1/3rd VTI (MSCI US Broad Market)
1/3rd CWI (MSCI All-Country xUS)
1/3rd AGG (Lehman Aggregate)

Unless you travel to distant planets you would be hard pressed to beat this portfolio.


Since I'm the one who travels to distant planets, I thought it appropriate to defend myself from such a nasty attack. 


Using Morningstar's X Ray I looked at returns on the port you just suggested vs portfolio's from three fund families on the infamous Jones Preferred fund family list.  American (ABNDX,CWGIX,AGTHX), Franklin (FKBAX,TEBIX,TEDIX), and Hartford (ITHAX,IHGIX,ITBAX - They call it their Checks and Balances strategy).  1/3 each fund just like AllREIT had his.  Guess what!  All of the mutual fund hypo's beat the ETFs.  Not just by a little, by a lot.  The 5 year mean differential is astounding.  The 5 year standard deviation wasn't even a close race either.  The three year numbers come out the same way, except the SD on the Hartford funds is slightly higher.  Here are the results:


                 5 yr mean         5 yr SD


American      10.9         &n bsp;     8.55


FT         &nbs p;     11.02         & nbsp;   6.31


Hartford        8.97         &n bsp;    8.55


ETF         &nb sp;    4.45         &n bsp;   10.87


Guess that flying around to other planets has taught me a thing or two. 


Now, the ETFs would have been cheaper (unless you are doing it fee based), but the returns are obviously better.  There are no 10 year numbers in X ray for the ETFs, so maybe they would have been better.  Who knows.  We'll see in 5 years.



Mar 8, 2007 12:27 pm

Spiff make sure you go back and use your "x-ray" to also look at how much overlap there is between the funds, and how much AGTHX has drifted into international exposure.

That's all well and good when international is the place to be.  If the USD rallies your clients might be a little suprised and not so happy.

Just a thought for your consideration.  Not meant to be a potshot.

Mar 8, 2007 1:25 pm

Thanks for all the etf talk-I appreciate any and all opinions to digest
on this.  I met the guy today and found out he wants a Barclays
Int Index, which was recommended to him by a "rich friend," never heard
that before right?  I don't believe this is the most appropriate
investment for him, for various reasons, but will likely be making the
purchase anyway.  It only amounted to 1/3 of the $ he is
investing, and he told me to do whatever with the rest.  One of
those situations where as a new guy I am taking the business without
total control of the client/advisor direction.

Mar 8, 2007 1:36 pm

So you're buying WTFs instead!


Mar 8, 2007 1:38 pm
Whomitmayconcer:

So you're buying WTFs instead!





Ok that one was pretty good...

Mar 8, 2007 2:01 pm
joedabrkr:

Spiff make sure you go back and use your "x-ray" to also look at how much overlap there is between the funds, and how much AGTHX has drifted into international exposure.


This is exactly why you can't use active funds correctly in an asset allocation strategy. If AGTHX is your domestic LCG fund, why is 20% in international markets?


People like Spaceman Spiff do their clients a disservice, because they are focused too much on investment returns and not on investor returns. There's a big difference. See QAIB... 

Mar 8, 2007 2:42 pm

I said nothing about an investor in this situation.  I just ran the numbers.  The buy and hold with the ETFs mentioned would have been smoked by the mutual funds applying the same philosophy.  Overlap, style drift and all.    


I'm not going to debate QAIB (Quantitative Analysis of Investor Behavior) with you.  It's absolutely true.  I've heard the studies on Magellan that says the avg investor actually LOST money in that fund when Lynch was running it, despite it's phenominal returns.  People are sheep and there are too many wolves out there for their own safety.   


Mar 8, 2007 3:59 pm
Spaceman Spiff:

I said nothing about an investor in this situation.  I just ran the numbers.  The buy and hold with the ETFs mentioned would have been smoked by the mutual funds applying the same philosophy.  Overlap, style drift and all.  



The point is that during that period the funds you mentioned out-performed because of their overlap and style drift. That same overlap and drift can and will work against a client when the wind changes direction.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


Having said that, I disagree with the simplistic 1/3, 1/3, 1/3 ETF strategy presented earlier. I like ETFs and use them often, but making the same mistakes with ETFs that are often made with mutual funds (being slap-dash, one size fits all) isn’t a good idea, imho.


Mar 8, 2007 4:44 pm
Spaceman Spiff:

I said nothing about an investor in this situation.  I just ran the numbers.  The buy and hold with the ETFs mentioned would have been smoked by the mutual funds applying the same philosophy.  Overlap, style drift and all.    


I'm not going to debate QAIB (Quantitative Analysis of Investor Behavior) with you.  It's absolutely true.  I've heard the studies on Magellan that says the avg investor actually LOST money in that fund when Lynch was running it, despite it's phenominal returns.  People are sheep and there are too many wolves out there for their own safety.   




In this case it is not at all about QAIB.  It's about truth in labeling and the fact that American has gone WAY outside what most would think is a "normal" allocation to international for a growth fund or a typical balanced investor.

How many typical clients do you think are actually ready to take on the risk of having 30% or more in international?  It's all good when American makes a big bet on international and it works, but what about when it goes the other way and their allocation is WAY outside the norm and your clients LOSE money when their friends are making money?

Mar 8, 2007 6:03 pm
theironhorse:

I don't believe this is the most appropriate
investment for him, for various reasons, but will likely be making the
purchase anyway.  It only amounted to 1/3 of the $ he is
investing, and he told me to do whatever with the rest.  One of
those situations where as a new guy I am taking the business without
total control of the client/advisor direction.





One big benefit of ETF's is that they don't have style/cap/strategy
drift.The iShares MSCI switzerland fund, will never start owning
Vietnamese tech because it happens to be the hot area.



I don't know what ETF you are talking about (making your posts as detailed as is reasonable is a good idea).



If its a general market ETF, I would remind the client of the fact that
the decline of the USD is responsible for about 50% of the performance
of international investments of every sort. Get a nice chart of USD vs
Tradeweighted Basket from the FED and go over it with clients.



That means that unhedged x-US investments have a big think layer of FOREX risk over their own investment risk.



If its EEM he likes, I'd tell him  that VWO is the exact same fund
but for 30bp vs 75bp. If he likes EFA, You can build that with a 2:1
ratio of VG's MSCI Europe and MSCI Pacific.

 

If its a single country fund, I'd tell him that's highly questionable
unless its a single developed country fund, in which case it is merely
questionable.



If he likes FXI (MCSI/Xinhua China 25) I would tell the client that its
a bubble, and remind him what Seth Klarman says about stupid though
fashionable investments.



Really the best international fund is CWI, the MSCI all-Country world
index x-US. This gives you the entire planet x-US for onl 35bp. Given
that the US is only 49% of the MCSI world index, most people should own
more of this.

Mar 8, 2007 6:06 pm
mikebutler222:

Having
said that, I disagree with the simplistic 1/3, 1/3, 1/3 ETF strategy
presented earlier. I like ETFs and use them often, but making the same
mistakes with ETFs that are often made with mutual funds (being
slap-dash, one size fits all) isn’t a good idea, imho.





What didn't you like about an allocation to the entire planet in market
proportions and an 33% allocation to US investment grade bonds?




Mar 8, 2007 6:17 pm

This is what he wanted me to "find" for him.  Barclays
International Index Fund.  The funds goal is to match the MSCI
World ex-US Index.  Diversified in 1100 foreign stocks and 22
countries.  It is a global equity index fund (not a mutual
fund).  It is a commingled pool managed by Barclays Global
Investors, N.A.



That is what he gave me....no ticker symbol or anything else.  I
am beginning to think it is held in a retirement account and not
available like he thinks it is.  I cannot find it anywhere-but was
also planning to recommend CWI as a substitue.  If the thing is
suppose to mirror the index, why not just buy the index?