ETF Strategies or Strategic ETFs?

As we try to line up our ducks for the Superbowl of Indexing conference for the panel I am moderating that I

titled Where Are We Now? ETF Industry Review, one of the panelists made an interesting comment that ties into a comment left by a reader on the above linked post.

The thread is along the lines of rules based or strategy based ETFs doing the work instead of the end user doing the work and given this, is this the direction that the end user market actually wants to go in.

If that is unclear, here is an example with a strategy for which there is no fund. Certain market participants take heed of the action between the Australian dollar and the Swiss franc expressed as AUDCHF (this is not made up). When AUDCHF goes up, so the Aussie going up at the Swissi's expense, it is perceived as a risk on environment and when AUDCHF is headed lower it is risk off. Anyone so interested could play this with ETFs going long one and short the other or vice versa. A fund provider could create an ETF that plays these two currencies against each other based on some sort of rules based criteria or an end user could simply do this directly using the corresponding ETFs and assuming they had a margin account to accommodate short sales.

Applying the example to any fund in existence that might be of interest to you; would you rather build it yourself or have a fund company build it for you? There is no wrong answer unless the market votes with its dollars and no money goes into the strategic funds and they end up closing. But that is the issue, does the marketplace want these or would most end users prefer to do it themselves.

The way the conference panels go (very quickly without getting to even half the things planned for) I think this one will fall through the cracks but it is a great talking point about the future direction of the ETF industry. My preference leans toward doing it myself but not exclusively. The core of our portfolio is a combo of very simple products each with very specific attributes blended in such a way as to hopefully deliver a predictable result--most importantly the volatility of the portfolio versus the market being predictability sought after.

Simple products above means narrow products. An individual stock might be a good pick or a bad pick but most high yielders stay high yielders, many volatile holdings are volatile most of the time, most low beta holdings are low beta most of the time; Cameco (if we owned it) would likely always be a proxy for volatile, materials exposure and if some aspect of that changed then the name could become a sell.

The Rydex Managed Futures Fund (RYMFX) is an example where we had good luck during the meltdown with a product where the work was done for us although the result of the fund was precise and consistent; low beta, low correlation exposure in a market that was puking down.

The bigger idea is avoiding blunt instruments and the broader the investment product the more blunt it will be. A portfolio full of blunt instruments has been exactly the wrong way to position for many years now and I believe will continue to be wrong for years to come. As I tend to not be an all or none person some products where the work is done for you are ok but I prefer to do it myself.

The Maui Invitational starts today one hour before the close.

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