ETF Investment strategies by Aniket Ullal

ETF Investment strategies by Aniket Ullal

1) Transition from traditional to emerging mindset

	Traditional	Emerging
Investment Approach	Passive vs Active	Trad-able beta
Asset Allocation	Usually by institutional and sophisticated investor	Multi-asset allocation available to all
Fund and security selection	Undervalued stocks and 5 star mutual funds	Find targeted ETF (sector-ail. Asset type, specific themes, country investing)
Execution	Quarterly reporting, end of day NAV	Daily transparency, intra-day liquidity

2. Transition from commission based to fee based advisory

1. Informational advantage is no longer monopolized by specific brokers and fund managers. Research is widely available and any investors can access the same information.
2. The supposed confidence in the expertise of brokerages and financial institutions is eroded by the 2008 subprime crisis. High commission fees does not lead to beating the market. Actively managed funds often fail to beat or even match index returns.
3. Increasing awareness of low cost alternatives like low cost index funds. Increasing amount of discount brokers, decreasing board lots, transparent comparison of performance,
4. Efficient market hypothesis advocated by academics. No one can consistently beat the market except for the rare 5 sigma individuals

3. Independent financial advisory (IFA model)
   i) Traditional brokerages are assorted financial products salesperson rather than looking after the clients best interests. They are incentive d on client acquisition and salesmanship rather than analyzing investment trends, relationship management or managing client portfolio.
   ii) IFA model decrease conflict of interest. Psychological shift that allows advisers to build long term relationship with clients.
   iii) Broker-Dealer services does not have fiduciary obligations. IFA have registered fiduciary obligations.
   iv) Brokerage models takes a large share of money from financial advisers. IFA have a larger portion of earnings they made for the organization.
   
   
   
4. Why ETFs
   i) Low cost management fees and expense ratios. Tax efficiency. Focus on eliminating downside although upside is still not guaranteed.
   ii) ability to be passively invested in the market without worrying about market news, ETFs will undergo security selection based on fund prospectus and principles
   iii) trad-able beta (exposure) to specific market segments,
   iv) Exchange traded leading to liquid holdings and high transparency
   v) ability to choose investment methodology and principles
   Market cap principle
   Fundamentally weighted principle
   Low volatility principle / High growth
   sector funds
   Black-Rock I-shares State street SPDRs
   
   

5. Fundamentally Weighted ETF	Market capitalization ETF
   Vanguard Jack Bogle ETF	STI SPDRs and Nikko AM STI ETF
   Fundamentally weighted principles to choose stocks according to undervalued criteria (sales, cash flow, dividends etc)	Too much exposure to overvalued stocks and too little exposure to undervalued stocks (market cap bias)
   Higher volatility to be expected, exposure to small caps, alpha is above Fama-French risk factors, value tilt	Market Capitalization allows exposure to the strongest companies with lowest risk of default
   Companies like apple will not be picked	Companies like apple will be picked
   Assuming you can beat the market by fundamental analysis screening	Purely track and match market return
   Higher costs due to increase in portfolio re-balancing according to fundamentals	Lowest cost, literally buy and hold

6. My own personal thoughts
   Ultimately, ETFs are a new product class that is created for investors that does not have in depth knowledge of specific markets, but wants exposure to it for his investment purposes.
   
   It has in-build diversification and usually low cost factors that make it seem attractive, and betting on improving market valuation to earn positive returns. Nonetheless, there is no guaranteed profit and its focus is on eliminating the downside rather than guarantee the upside.
   
   There is a strong slant towards ETF investing by local investment websites such as MoneyDigest and social media platforms. There are strong advocates of Efficient market hypothesis that believe in matching rather than beating the market. There are even some weird methodology like Dogs of the Dow which seem too abstract for me.
   http://boringinvestor.blogspot.sg/p/dogs-of-sti.html
   http://www.investopedia.com/university/stockpicking/stockpicking8.asp
   https://en.wikipedia.org/wiki/Dogs_of_the_Dow
   
   In Singapore specifically, there are ETFs created using derivatives that allow exposure to foreign markets such as India. I should treat those ETFs with caution as derivatives are subject to high fluctuations in its intrinsic value and counter-party risk, often leveraged and lastly beyond my circle of competence.