- New ETF offerings have blurred the line between active and passive management.
- Some reasonably priced ETFs use rules-based strategies that may outperform.
- A potential Actively-Managed Almost-Passively-Priced (AMAPP) portfolio is demonstrated.
Investors today have what can be a dizzying number of choices, even solely within the realm of equities. They can try their hands at stock-picking. They can hire someone to pick stocks for them, although they seem to be beginning to eschew that high-priced option. They can invest passively ("index") - and even the choice of indices has grown. However, a growing number of products in the ETF market are starting to blur the line between active and passive management.
These products typically offer fees between 40 and 80 basis points per year - more than your ultra-cheap Vanguard products, but still well below most actively managed funds. They offer exposure to groups of stocks that fit a specific investment profile or strategy. In this article, I will describe a model portfolio - the Actively-Managed Almost Passively-Priced (AMAPP) portfolio built on five ETFs that employ sound strategies at reasonable prices. They are:
The Cambria Shareholder Yield ETF (NYSEARCA:SYLD): Based on research by Gray and Vogel, the shareholder yield metric is comprised of dividends, buybacks, and net debt pay down. These are combined, and then compared to the current stock price. The fund seeks out companies with the highest shareholder yield. Launched in May 2013, the ETF currently holds $224.8 million in assets. Limited to companies with at least $200 million market caps, the fund's highest holdings include Frontier Communications (NASDAQ:FTR), Western Digital (NASDAQ:WDC), Lexmark (NYSE:LXK), Southwest Airlines (NYSE:LUV), and CenturyLink (NYSE:CTL).
The Cambria Foreign Shareholder Yield ETF (NYSEARCA:FYLD): Launched in December 2013 after the success of SYLD, the foreign version uses the same shareholder yield approach but invests in international stocks from the developed world. It currently has $84 million in assets.
The Market Vectors Wide Moat ETF (NYSEARCA:MOAT): Launched in April 2012, MOAT is the brainchild of Morningstar. It invests in companies that Morningstar analysts have assigned a "wide moat," aka a sustainable competitive advantage. Each quarter it chooses the twenty that are trading at the most attractive valuation, according to Morningstar's proprietary fair value calculation, and equally weights them. It currently has over $800 million in assets, and top holdings currently include BNY Mellon (NYSE:BK), Amgen (NASDAQ:AMGN), eBay (NASDAQ:EBAY), Western Union (NYSE:WU) and IBM (NYSE:IBM).
The PowerShares BuyBack Achievers Portfolio (NYSEARCA:PKW): Launched in December 2006, PKW invests in companies that have reduced their share count by 5% or more in the last twelve months. 5% in a year is a lot, so this strategy lends itself to companies that are relatively cheap, and flush with cash. Top five holdings are Home Depot (NYSE:HD), Oracle (NYSE:ORCL), Pfizer (NYSE:PFE), AT&T (NYSE:T) and Halliburton (NYSE:HAL).
The Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA:RZV): Launched in March of 2006, RZV is the ultimate in factor/style investing. This fund invests only in those stocks in the S&P SmallCap index that have strong value characteristics, and also weights them by their value scores rather than by market cap. It has been extremely volatile but has also generated very strong returns during market upswings.
The Actively-Managed Almost Passively-Priced (AMAPP) Portfolio
Cambria Shareholder Yield ETF
Cambria Foreign Shareholder Yield ETF
Market Vectors Wide Moat ETF
PowerShares BuyBack Achievers Portfolio
Guggenheim S&P SmallCap 600 Pure Value ETF
The portfolio has an annual expense ratio of 0.54% when each of the holdings is equally weighted. I had to put 'almost' passively priced in the title because that's still well above the single-digit expense ratios you can get from a variety of providers for purely market-cap weighted products.
I'm not a huge believer in backtesting unless there are at least 15 years available and ideally more than that. SYLD, FYLD, and MOAT are so new their performance histories are not really useful. PKW has slightly outperformed the broader market, and RZV underperformed during the crisis but has rebounded back nicely in the last five years.
The common theme to all of these funds is that they hopefully will systematically buy things that are cheap. The two shareholder yield funds buy things that are cheap, relative to amounts returned to shareholders. MOAT buys things that are cheap relative to estimates of intrinsic value. PKW buys things that are cheap relative to the amount spent on buybacks, and RZV buys things that are cheap relative to other stocks. For investors who do not have the time or inclination to pick stocks themselves but still want to be value-conscious, I think these are solid choices.