Larry Swedroe, the director of research at Buckingham Strategic Wealth and the BAM Alliance, took some time to speak with WealthManagement.com before the Inside ETFs conference in Hollywood, Florida, on Jan. 21-24. The prolific author and advocate of evidence-based investing is giving a presentation at the conference on creating more efficient portfolios and “reducing the risk of black swans.”
Swedroe is also a veteran of sorts at the Inside ETFs conference. This will be his fourth year in a row speaking (“I’m guessing I’ve gotten good reviews,” he said) and in addition to his presentation he has much to share on the limitations of ETFs, the future of active management and who conference attendees should seek out and listen to.
Responses have been edited for length and clarity.
What do you plan on speaking about at the Inside ETFs conference?
“We’re going to show people how we build, we think, have much more efficient portfolios with much less downside risk to allow them to sleep a lot better and give them a better chance of not running out of money.”
Some people say volatility will return in 2018. If that happens, do you think active management is due for a comeback?
“Each year I’ve done a different talk on what I think are important issues. Last year I did a talk on my book, The Incredible Shrinking Alpha,... active management is only going to get harder and harder every year. Every year for the last 20 years, basically the odds of you outperforming through active management have shrunk. Twenty years ago, when I wrote my first book, research was showing that about 20 percent of active managers were outperforming appropriate risk-adjusted benchmarks on a statically significant basis. So we could say with a reasonable degree of certainty that it wasn’t luck, it was skill. And that number is down to 2 percent or less.”
On ETFs at Buckingham Strategic Wealth:
“We’re kind of unusual. We have used [ETFs] but in a very minor way, mostly to do tax swaps or substitute [baskets]. The reason is that the mutual funds we’re using are already tax-managed. ...The intra-day trading [of ETFs], we think, is a negative. It just tempts people to want to do things they shouldn’t be doing.”
Another reason they don’t have many ETFs:
“ETFs do not give us the high-level of exposure to the factors that we want. You can’t get the same loading on the factors that we get.”
On using more ETFs in the future:
“We’re kind of the rare bird in the sense that we hardly use them. It doesn’t mean we wouldn’t use them, but we’d have to find one that we think is better for our clients than the ones we’re using and we haven’t found them yet.”
Any topics you’re hoping to learn more about, either from other speakers or just by conversing with others at the conference?
“Much of topics at these conferences are ‘what are the markets going to do, what should your asset allocation be, where should you be moving money?’ To me, that’s all B.S. I think it has absolutely no value. And so I don’t ever go to listen to people that are talking about forecasts because I believe there are no good ones.”
“Now, if you get a speaker talking about what risks the markets may face, risks you should be aware of ... about academic research or factors and how you can apply them? And is there a better methodology? Those I am always eager to hear. I want to know the logic behind the research; where the science of investing is, not people’s opinions. We don’t make any investment decisions or recommendations based on anyone’s opinions but our own. So we only invest based on academic research.”
On Inside ETFs in general:
“I think [the conference] is very well run, it’s just that most of the topics are stuff that I think people are better off not listening to because they’ll only get tempted to act. Inaction is better. They should just be sticking to their plans that are well-thought-out and incorporate the likelihood that all these different risks might show up and your plans should be designed to withstand that.”