ETFInsights Conference

Yesterday I participated in the virtual ETFInsights conference put on by InvestmentNews. My co-panelists were Gus Sauter from Vanguard, Sam Stovall from S&P and Rudy Aguilera from Helios. Needless to say there are some big names there and I made four. After it was over one of the moderators said there were about 900 virtual attendees. Based on what I could see in the conference software I didn't think it was that much but maybe so.

It seemed as though the four of us had divergent opinions on all sorts of things. I'll try to cover as much ground as memory permits but not necessarily in the order it happened.

Early on I was asked how I use ETFs in client portfolios and how we explain them to clients. I talked about ETFs simply being tools. In some cases they are the best tools (subjective opinion of course) and sometimes not. In trying to embed decisions about sectors, countries and themes into the portfolio we will use ETFs or stocks, whatever we think is best.

I cited our long time holding in PowerShares Water Portfolio (PHO) as an example where we think an ETF is the way to go and as an example of a stock being the best way to go I mentioned our long time holding in Statoil (STO). The follow up question was what would be an example of something where there was an ETF but I chose a stock instead. I mentioned that we own Nike instead of a discretionary sector fund because those funds tend to be heavy in restaurants and electronics retailers (I should have also mentioned media stocks) which I do not want to own and that Nike benefits from the aspirational purchase in many countries around the world.

Someone else brought up the short and double short ETFs. As the conversation moved to correlations going up to 1 during the panic. Sam Stovall said that a portfolio of 60% equities and 40% treasuries (he may have said fixed income) was only down 13% (I think I am citing the correct number). He said treasuries did go up but other than that only the inverse funds went up.

One of the moderators asked how do you know when to buy an inverse fund. Long time readers will not be surprised to know that I jumped in with the 200 DMA as one catalyst for buying an inverse fund and explained how we do it and how we size the position. To circle back to Sam's citing a 60/40 portfolio; although I did not make this point for fear of setting an unnecessarily hostile tone it makes no sense to me to compare the result from a portfolio of stocks and bonds to just stocks. Asset allocation, as important as it is, is a different conversation than how the equity portion of a portfolio held up.

At one point Rudy, a self described indexer, was fairly vocal in saying that no one can predict the future in response to my comments about the 200 DMA as a catalyst for defense. It did not work out that I had a chance to respond but the 200 DMA is not necessarily about trying to predict the future. The way I have described and more importantly how I have used it is as a gauge for whether demand for equities is healthy or unhealthy. If the market is below its 200 DMA then I take that as meaning demand is unhealthy regardless of the reason. When demand is unhealthy the tradeoff between risk and reward becomes less favorable, IMO, which augers for some amount of defense. There is nothing necessarily predictive about demand being unhealthy.

When demand gets healthy again then a more invested posture becomes warranted. In my original answer I noted the potential to get whipsawed and talked about taking incremental action. Demand healthy or unhealthy today is not about having a crystal ball.

Later I was asked about commodities. I talked about what we own and why and that I really had no interest in the ETNs, at least not now. Rudy then brought up the tax implications of holding a precious metal ETF and asked rhetorically why not own options instead of a precious metal ETF. The way I view this is that in addition to knowing something about whatever metal you have in mind you would also need to understand the gamma and theta of the options for that underlying. For some folks, like Rudy, they do understand nuance here and so it can be valid for them but it is not something I am likely to do.

At one point Stovall put in a plug for Standard & Poors new ETF rating system which does a bottom up analysis of the stocks in the funds to rate them. Again for fear of an unnecessarily hostile tone but bottom's up analysis of all funds belies a lack of understanding on someone's part--not necessarily Stovall. The only exception might be when one stock comprises 15-20% of one ETF. In that instance I think there needs to be an understanding of that company and some sort of opinion on it but not a bottom's up screening on every stock in the fund. Broad-based funds are simply exposure and narrow based funds are, IMO, about top down and forward looking expectations.

Sauter talked about the problems that some inverse ETFs have with daily resets, which some do, at one point he mentioned that they don't go to the level I was talking about in terms of country, sector and theme and the other thing I remember him talking about was using limit orders.

One thing was clear is that there are many ways to achieve the same general outcome. All four of us come at it differently and naturally all four of us think our way is the best. I'm not sure how useful it was for the audience which was financial advisors who think of themselves as experienced with ETFs. I certainly hope it was useful. Naturally as I was speaking I thought I was blathering but I guess will know for sure based on whether they have me back next year or not.

There were a lot of other things I would have liked to have talked about like country selection. I talked some but wish it could have been more.