1. What are the key factors you're looking for when choosing a particular ETF among many available to capture a given sector?
- There are more than 800 ETFs trading, many of them representing similar themes.
- There are few “right” or “wrong” answers when it comes to choosing ETFs – it’s what’s right for you as an investor.
- Some things to look at before you buy an ETF:
- How much does it have in assets under management? A general benchmark is the $100 million mark. The more assets, the more confident an investor would be with liquidity.
- Trading volume, which tracks the cumulative buying and selling of an ETF. A fund with no volume means no one is trading it, and it could be expensive to buy or sell. The goal is to buy ETFs with tight bid/ask spreads. Low volume ETFs can have larger spreads.
- Diversification. Some funds can have high exposure to similar asset classes, despite having completely different objectives:
- The fund’s holdings. Some funds have their holdings fairly evenly spread out over about 100 holdings. Other funds will have their top five holdings account for 50% of the fund’s total assets.
2. Can you give an example of two sector ETFs that you considered, and why you chose one over the other?
When the consumer staples sector was in an uptrend, we had two large ETFs to consider that represented the sector: the Consumer Staples Select Sector SPDR (XLP) and the Vanguard Consumer Staples (VDC).
At that time, both funds were above their long-term trend lines (the 200-day moving average), so:
- We first examined the holdings to see how diversified they were; both funds came out fairly equal on that front.
- It then became an issue of trading volume and assets under management; as of Monday 12/14, assets in XLP were $2.3 billion with an average trading volume of 3.9 million shares; VDC had $591 million in assets and an average trading volume of 31,000 shares.
- We went with the fund that had more assets and greater trading volume to ensure liquidity when we needed to sell.
3. Is ETF selection and portfolio construction something the individual investor can effectively do on their own, or given the complexities and the dynamic nature of this market, do you think it's best left to a professional?
There’s more information, education and statistics out there than ever before, and it’s all virtually free for investors who want help and guidance in making decisions. It’s certainly possible for investors to build portfolios on their own.
The real question is whether these investors have the discipline to create a portfolio and investment plan that’s right for them, and to stick with that plan over time. We don’t spend enough time talking about how emotions can affect the success or failure of the average investor.
4. Where do you get your news and views on ETFs? Are there particular sites or resources that are indispensable in your ETF selection and reference process?
- ETF Trends, of course: we have charting, an analyzer that shows all funds with at least $50 million in assets under management relative to their 200-day and 50-day moving averages, as well as daily news and information about the ETF industry and trends taking place.
- Morningstar has great articles on ETFs, as well as screeners and profile pages.
- Yahoo! Finance is a great source of information with real-time charting and historical data and news.
- Index Universe has insightful articles and great data on new ETFs and funds in registration.
- Debbie Fuhr at Barclays publishes an excellent newsletter chock-full of statistics and information about the global ETF industry.
5. What are your thoughts on the relatively new actively managed ETFs? If an investor is interested in purchasing an actively managed ETF, what are the important elements to look for?
A number of players have entered or are close to entering the actively managed ETF space: Grail Advisors, PowerShares, T. Rowe Price, PIMCO, Harry Dent, Claymore.
Even though managers have had appealing track records before launching into ETFs, most advisors and investors are going to be watching and monitoring these ETFs. If they provide alpha, we’d expect that they’ll garner attention.