As the exchange traded fund (ETF) industry grows, new and increasingly more esoteric product types are appearing. Do they have a place in your portfolio? A few experts weighed in on the topic during a webcast earlier this month.
David Hoffman and Evan Cooper for Investment News report on how certain industry insiders feel about non-traditional ETFs in portfolios. The excellent and informative full webcast can be viewed in Investment News’s archives.
On leveraged and inverse ETFs in general:
John Carr of Carr Schwartz Butterfield: The leveraged funds are on the radar of FINRA, the SEC and many states, so advisors are required to document the performance of the ETF, and prove how the funds are helping out a client’s portfolio. It is up to the advisor to prove why the ETF is suitable and necessary for their clients.
Kathleen Moriarty of Katten Muchin Rosenman: I would really encourage potential investors to at least read the summary portions of the prospectus, because in all of the leveraged and ETF prospectuses now, they give actual examples, either in the front part of the prospectus or in the back, of how the mechanism works. Half of the problem comes from people not understanding how the investment works.
On these ETFs and whether their performance meets expectations:
Paul Schatz, president and CEO of Heritage Capital: For the most part, yes. However, if you really dial down to the double- and triple-leveraged funds, both the long and the shorts got hammered last year because of the compounding effect.
Paul Simon, chief investment officer at Tactical Allocation Group: When you’re going to a two- or three-X, whether it’s an inverse or a leveraged situation with one of these ETFs, they’re inherently going to be more volatile. But in a situation like the last 18 months, where volatility was unprecedented, its a bad mix. It’s the main reason to do your homework, and to be careful. (Do leveraged ETFs actually belong in your portfolio?)
On active ETFs:
Ms. Moriarty: There is no true active ETF yet. And in order to understand this, you need to know a three-second background on how the ETFs started. Basically, the ETFs are very odd kind of mutual fund. The real Holy Grail is to do a non-disclosed actively managed fund. And there are about six different ideas of how to do this. They have been down at the SEC pending review for about two to three years, and I don’t know how much longer that’s going to take. (Will the demad for active management in ETFs grow to mainstream?)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.