Wednesday, 15 May 2019 06:26

How to Personalize Portfolios with ETFs

(New York)

ETFs are obviously the biggest financial product of the decade, and have been very broadly adopted by advisors. However, how advisors actually use them varies greatly, partly due to the diversity of the asset class. There are around 2,200 ETFs covering a seemingly endless variety of niches. But within that cornucopia of offerings, which can be dizzying, lays the opportunity to personalize. Specifically, the large variety of highly specialized approaches allows advisors to be very tactical with portfolios without the need to buy specific stocks. Further, since ETFs are replicating a benchmark, they do not suffer from “style drift” like mutual funds do. In that way, the sectors/niches they track are more reliable and can be depended on for the role they play in a portfolio.


FINSUM: This might be obvious to some, but there are many out there who still only use ETFs are ultra-cheap trackers. Some of the new offerings provide really interesting exposure to specific areas—part of the reason they have been heavily adopted by hedge funds.

Published in Wealth Management

(New York)

Vanguard funds have been performing well for years. That performance, mixed with ultra low costs is the reason they have thrived over the last decade and now contend for being the largest asset manager. However, there is a little known reason they have done so well—they employ a patented system for minimizing taxes in mutual funds. Vanguard uses a trading technique employing “heartbeat” trades which move stocks between ETFs and mutual funds in such a way that completely eliminates the taxability of their capital gains. Vanguard employs the strategy on 14 funds, and those have reported a combined $191 bn in gains while reporting zero to the IRS. Vanguard says the technique is entirely legal and has a patent on it through 2023.


FINSUM: This is an excellent competitive advantage and we thought advisors would like the view under the hood as to why Vanguard is thriving as one of the very best fund providers.

Published in Wealth Management
Thursday, 25 April 2019 11:42

The Most Popular Mutual Fund Stocks

(New York)

So what are the most popular funds held by mutual fund managers right now? This is always an interesting question, not only because it can give one ideas, but also because it can serve as a counter-indicator. Stocks that are very widely held tend to be over-bought and the most at-risk of falling sharply. The most popular stocks right now are Alphabet, Microsoft, Visa, Apple, Nestle, and Exxon-Mobil. Speaking about the outlook for these stocks, UBS, who made this report, says “Once these trades reach their critical value, or an exogenous shock occurs, we expect a sharp price reversal as investors unwind their exposure in tandem”.


FINSUM: Nothing particularly interesting in those top holdings, so the downside risk of them being there seems the most relevant.

Published in Eq: Large Cap

(New York)

The last year has seen a steady and encouraging rise of alternative fee structures in mutual funds. In particular, a number of managers have adopted so-called fulcrum structures to their mutual funds. All of these funds charge a low or zero base fee, and then a performance fee for outperformance of their relevant benchmark. The idea is that customers only have to pay up for services that actually outperform benchmarks. Some providers that now offer these funds include AllianceBernstein, Fidelity, Allianz, and Fred Alger. The main criticism of the funds that is that they can skew incentives and push managers to take outsized risk in order to produce upside.


FINSUM: These funds are not without their imperfections, but they are a useful and thoughtful response by mutual fund managers who are realizing they need to do more to justify their raison d’etre versus ETFs. We think they are a good deal for investors because if the results aren’t good, you pay very little, if they are great, you pay for it. Compare that to an ETF, where you are never going to outperform, but will likely pay more than 10 bp.

Published in Wealth Management
Friday, 12 April 2019 13:38

When to Dump a Losing Mutual Fund

(New York)

The Wall Street Journal has published an interesting article giving advice to investors on how to assess, and when to dump, losing mutual funds. The article makes the point that investors should not automatically clear out their losing funds, just like they shouldn’t always buy winning ones. Funds have their own reasons for poor performance and those reasons can have a big impact on whether they should stay in a portfolio. Here are four questions to ask in assessing funds, “Does the fund have a good process in place?”, “Is the manager sticking to his or her own guns?”, “Is there a new manager, and do I trust him or her?”, “Is this negative performance coming in a segment of the market in which it is tough to beat index funds?”.


FINSUM: Good funds can have significant down periods, so it is important to have a methodology for deciding if and when to dump them.

Published in Eq: Value
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