Of Investment Fads and Evolution

Seeking Alpha ran an article from Elliott Orsillo (any relation to Red Sox announcer Don?) that explored the utility of low volatility ETFs, specifically looking at the PowerShares S&P 500 Low Volatility ETF (SPLV). We own SPLV for a few clients.

The title included the word fad but it was more of a study of the effectiveness of the fund long term based on the sector makeup. The sector makeup of SPLV could change in the future but regardless of whether Orsillo was really looking at the faddish nature of low volatility funds, it is a good question. Are low volatility ETFs just a fad.

In a way they clearly are a fad. Based on investor demand many ETF providers have created low volatility ETFs and there is plenty of differentiation in methodology between the various providers. That description also applies to dividend ETFs. Investor demand, many providers, different methodologies and now investors have many dividend ETFs to choose from. I'm sure this description could be applied to other ETP segments too; VIX products?

The negative connotation here is a herd mentality and people getting in late. This is a valid issue and investors should be cognizant of getting in late to anything they choose to buy.

However it is also true that investing evolves. Think about commissions. When I was pitching Kodak at Lehman Brothers 22 years ago a $10,000 order had a $300 commission. Does anyone pay more than $10 for a retail trade anymore?

Products also evolve. What portion of investors believe indexing is the only way invest? Index funds only came into being in the 1970s and now there are legions of indexers or otherwise passive investors. The first US ETF came almost 20 years ago and it simply provided a different wrapper for an already easily accessed exposure. A few years later came the WEBS (since bought and rebranded by iShares) that offered index exposure to foreign countries. This type of exposure was not so easily accessed if at all before the WEBS. Then came the Sector SPDRs which was more of a different wrapper as Fidelity and Invesco had actively managed sector funds (I'm sure there were other fund companies that did too).

Since then ETPs have evolved to offer brokerage account access to all kinds of commodities, currencies, obscure countries and strategies. These are merely investing tools that some will use very effectively to create very sophisticated portfolios while others will not get it, use the funds incorrectly and have a bad experience.

As mentioned new products are often driven by investor demand. How do investors know what to demand? They are probably learning more about investment strategies and market segments than they previously knew about. It is a reasonable conclusion that investors know far more about Brazil, for example, than they did 15 years ago. Maybe this is because of the internet but whatever the reason investors know far more about many market segments and strategies than they did ten, 15 or 20 years ago.

The knowledge base has gotten broader in conjunction with access offered by exchange traded products.

I haven't said anything yet about this year's Tour de France but the action has been fantastic. Phil Liggett may have had his best line ever at the end of Tuesday's finish. It was an uphill finish to the stage and the riders were exhausted and Phil said "this is the slowest sprint I've ever seen." Great stuff.