My actively managed wrap accounts also beat the indexes consistently.  It’s all about picking the right horses.  Why would anyone want to track the indexes and underperform by their fee?!!

[quote=Indyone]My actively managed wrap accounts also beat the indexes consistently.  It's all about picking the right horses.  Why would anyone want to track the indexes and underperform by their fee?!![/quote]

The only time we put people into etf wraps is when they want it for some reason (too much CNBC?) or they're acting weird about fees...  But I'm always thinking: "great, 6 months from now I get to show you how we underperformed the indexes".  But eventually, I get some of them to go w/ our fund wraps, which beat other asset allocation investments (C shares, VAs w/ AA, etc.) that I watch.

I'm still looking for the etf or index AA investment product that is competitive to show clients, cuz the EMH story would be a real nice yarn to spin on the white board!

[quote=Big Taco]

I'm definitely not in my element on a EMH discussion, because I don't beleive all the markets are very efficient.  That's why I'm asking.  I don't know if the basis for my reasoning is correct.

If EMHers don't worry about market timing or security selection (because their index funds will buy/sell a security when it enters/exits the index based on market cap), then it would seem that the only thing left is a) fees, and b) Asset Allocation, right? 

So DFA does better (tactical?) asset allocation and lower fees than other passive asset allocation funds? 

[quote=Big Taco]So if it all just comes down to 1) lowest expense 2)
matching passive indexed investments with appropriate AA, then what is
DFA offering that a vanguard (T Rowe,Fidelity,etc.) AA index fund
won’t?  I don’t get it yet.  Are they tactically
allocated?  or static AA?  I thought EMHers wouldn’t go for
tactical ANYthing, because they feel there’s never any worthwhile
inefficiency to exploit?  [/quote]



Mostly DFA is offering smoother indexes and more comprehensive funds.
I.e without the discrete jumps from having single Large/Mid/Small
indexes and because people who invest with DFA tend to be long term
folks, the funds to offer much more complete exposure to the
small/microcap market segments.



It’s all static, and its up to the advisor to choose how much more risk
exposure to small+value he wants over the total market index.

[quote=Big Taco]

and on the EMH once again, I remember reading a
blog from Travis Morien about how he attended a conference w/ Fama
& French, and his perception was that even one of those guys wasn’t
as gung-ho about EMH as would be expected… but that’s hearsay.

It’s too bad this conversation is buried in a EDJ thread, this is good stuff.

[quote=AllREIT] The classic story is of two finace professors from UoChicago walking along and seeing a $100 bill on the sidewalk. One prof tells the other not to bother to pick it up, since if it really was a $100 bill someone would have picked it up already.
[/quote]

Hilarious!

I looked up DFA on Advisor Workstation.  I’d use some of them.  But reading about their corporate culture, and how they “turn away” advisors who don’t completely buy into their EMH culture, well, that’s not me.  I like that Europe fund, though. (DFCSX)

Everytime I realize a club is too exclusive for me, I remember the Groucho Marx quote:  “I don’t care to belong to any club that will have me as a member”

[quote=Big Taco]I looked up DFA on Advisor Workstation.  I’d use
some of them.  But reading about their corporate culture, and how
they “turn away” advisors who don’t completely buy into their EMH
culture, well, that’s not me.  I like that Europe fund, though.
(DFCSX)

Everytime
I realize a club is too exclusive for me, I remember the Groucho Marx
quote:  “I don’t care to belong to any club that will have me as a
member”[/quote]



It depends, in someways its just a varient of EDJ’s kool-aid and
preferred funds. Although the level of sophistication on both sides
(advisor/client) is much higher.



Also, the situation they don’t want is a bunch of performance chasing
FA’s cluttering up the funds operations with constant in/out flows.
Like all passive funds, they tend to have top quartile performance
(since 80%+ of active managers can’t beat indexes)



Once you understand whats going on, it is very easy to replicate using ETFs.

I agree, Max…I almost didn’t even see this conversation because of where it was…

No, I get it.  It's good.  The exclusivity ensures that investors are more buy&hold, which decreases outflows, which inturn decreases expenses.  I like it, I'm just not an EMHer.  I still haven't found the way to charge 1%, invest according to appropriate asset allocation, AND offer index-beating returns consistently with index/passive investments.  my office is still impressing clients the most with our actively managed fund wraps.

If I could get the best returns w/ passive investing, I'd be writing the expenses line-item on the whiteboard all day everyday, next to the alpha, beta, std dev..., and comparing them to how we "used to" invest in managed funds.  Slam dunks. 

[quote=Maxstud]It's too bad this conversation is buried in a EDJ thread, this is good stuff. [/quote]

Max,

 I have to agree. Most viewing this thread are Jonesers. EMH,DFA,ETF, bounded arbitrage - WTF?  90% of us Jonesers don't have a clue about this and the other 10% are leaving and could care less.

[quote=Big Taco]

No, I get it. It’s good. The exclusivity ensures that

investors are more buy&hold, which decreases outflows, which inturn

decreases expenses. I like it, I’m just not an EMHer. I still haven’t found

the way to charge 1%, invest according to appropriate asset

allocation, AND offer index-beating returns consistently with index/

passive investments. my office is still impressing clients the most

with our actively managed fund wraps.

If I could get the best returns w/ passive investing, I’d be writing the

expenses line-item on the whiteboard all day everyday, next to the alpha,

beta, std dev…, and comparing them to how we “used to” invest in

managed funds. Slam dunks.

[quote=Philo Kvetch] The ability to use stops helps to protect
the portfolio when the particular index turns south.[/quote]

What do you mean by the ability to use "stops"? 

and when you say it's not about using 1 etf to beat 1 index, do you mean: utilize appropriate asset allocation for clients' risk tolerance? 

Because we do that.  It's when we use the same exact risk tolerance asset allocation model (modrate, moderate aggressive, etc) for both an etf wrap charging 1%, OR a managed fund wrap charging 1%, that the managed accounts have always beaten the etf wrap returns consistently.

stops = stop orders? 

Yes.

[quote=Philo Kvetch]In reality, it’s not about one ETF’s inability to beat it’s corresponding
index. It can’t. It’s about an appropriate mix of ETFs generating a
positive net return for the client. The ability to use stops helps to protect
the portfolio when the particular index turns south.[/quote]



This is something alot of folks don’t understand. SPY will not beat the S&P 500 index.



An ETF is measured on its ability to track an index, not on the
performance of the underlying index. For example the XHB SPDR
homebuilder ETF has done a good job tracking its index, however XHB’s performance sucks though.



Recently there have been alot of “alpha seeking” ETF’s come to market
from Powershares, Claymore, FirstTrust etc. These all have high fee’s
(0.60-0.80%). Some of them seem pretty neat, such as the CSD (Clear
Spinoff Index) and NFO (Sabrient Insider Sentiment) etf.



IMHO these etf’s have “strategy risk” embeded in them. I.e owning the
PIV etf is a bet on the Valueline system, owning PDP a bet on Dorsey
Wright’s Relative strength methodology etc. Alot of these strategies
are untested and will probably not perform as well as backtests. The general rule is that financial gadget’s don’t work very well.



It’s getting to the point where you can do pretty much anything with
ETF’s these days. For example, I have a few "socially responsible"
clients, so for them I use the DSI/KLD funds and a vanguard mortgage
backed securities fund (No US T-bonds since they finance the evil Bush
regime.)

Philo, I don’t understand why you would want to sell an asset class when it’s down.  Isn’t that a great opportunity to buy inexpensively when you rebalance?  Take profits from the areas that did well last year or quarter and reinvest into the etf that did poorly during that time? 

I had not considered placing stops on etfs.  Plus, market orders expire so quickly.

[quote=Big Taco]Philo, I don't understand why you would want to sell an asset class when it's down.  Isn't that a great opportunity to buy inexpensively when you rebalance?  Take profits from the areas that did well last year or quarter and reinvest into the etf that did poorly during that time? 

I had not considered placing stops on etfs.  Plus, market orders expire so quickly.[/quote]

Philo, I had to respond to this.

What??  Taco you must be kidding. Don't tell me at your clients annual review you say, "oh this small cap value did 31 percent last year we need to sell it or take profit and buy our worst performing large cap growth fund that did 4."  You could have done this the last 5 years and killed your clients returns.  Some of us don't follow the pie chart methodology. I suggest you explore what your company may not be teaching you. Let's take for instance joneses preferred list. They never changed that lie until they got their ashes put against the flames from the revenue sharing. Voyager was on that list until it was a joke to see how long they could keep it there. 

What I am saying is if Philo sells an etf because it is down. He may be using a different methodology that says this class etf is not longer supported for whatever reason. He doesn't buy down, because it could 3 months, 6 month,s or 3 years before that class gets support.  Those of us that use technical analysis understand. My opinion is to never put a time frame around the investment itself. It is what it is.   Clients are the ones that think in 12's. We don't know when high is high and low is low.

[quote=Bamzor]

What I am saying is if Philo sells an etf because it
is down. He may be using a different methodology that says this class
etf is not longer supported for whatever reason. He doesn’t buy down,
because it could 3 months, 6 month,s or 3 years before that class gets
support.  Those of us that use technical analysis understand. My
opinion is to never put a time frame around the investment itself. It
is what it is.   Clients are the ones that think in 12’s. We
don’t know when high is high and low is low.