Narrow Based ETFs

IndexUniverse has a useful post up that compares the PowerShares Aerospace & Defense Portfolio (PPA) and iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA). Obviously the two cover a lot of the same ground and perform very similarly to each other. I have been a big believer of keeping a defense stock (or if you prefer, an ETF) in the portfolio as something that might go up in the face of certain types of external shocks. The article spells out some of the macro factors that make the space compelling as well, at least I find it compelling anyway. This is a pretty good example to support the case to go narrower than broad based index funds. In an equity portfolio with four or five broad based equity funds there is very little chance of creating any sort of zigzag effect in the portfolio. In the case of four broad funds you really have four funds that will move in the same direction but in different magnitudes and probably with different volatility characteristics. So they represent different market segments, broadly speaking, but the actual diversification is not that effective. In the face of certain external shocks gold and defense stocks have a pretty good chance of going up. This effect cannot be created with a combo of SPY, IWM and EFA. For anyone interested in going narrower in their portfolio construction and including defense stocks they either need to buy one of these ETFs or buy an individual stock. We have a bigger cap defense stock instead of an ETF and at times it outperforms the ETFs...

What Is Average?

Last week I put up a post about active versus passive investing that included my belief that the debate is not as linear as people make it out to be. I don’t believe that alpha has to be finite, I do believe people can beat the market but not all the time, there are way too many variables for this to be tied together in a tidy and congruous fashion. It is just more complicated than that. On the Seeking Alpha version of that post a reader engaged me in an interesting discussion summing up his point by noting that for every active winner there must be an active loser and lumping them together equals the market’s result. Again I do not believe it is that simple, first there is no way to lump everyone together, I mean everyone. Would you define someone who went 100% cash on January 2, 2008, an active manager or a non-participant? I responded that I am not saying most people beat the market just that explaining this is not as simple as the academics believe. The reader responded that “even outside of academia it is impossible for the average person to be above average.” I responded again with what I thought was an interesting example that I believe shows the potential complexity of the issue or should I say the lack of congruity in explaining the issue. First here are the results for the S&P 500 for the most recent bull market cycle and the down year of 2008 not including dividends. 2003 up 26.4%2004 up 9.0%2005 up 3.0%2006 up 13.6%2007 up 3.5%2008...

What Is Average?

Last week I put up a post about active versus passive investing that included my belief that the debate is not as linear as people make it out to be. I don’t believe that alpha has to be finite, I do believe people can beat the market but not all the time, there are way too many variables for this to be tied together in a tidy and congruous fashion. It is just more complicated than that. On the Seeking Alpha version of that post a reader engaged me in an interesting discussion summing up his point by noting that for every active winner there must be an active loser and lumping them together equals the market’s result. Again I do not believe it is that simple, first there is no way to lump everyone together, I mean everyone. Would you define someone who went 100% cash on January 2, 2008, an active manager or a non-participant? I responded that I am not saying most people beat the market just that explaining this is not as simple as the academics believe. The reader responded that “even outside of academia it is impossible for the average person to be above average.” I responded again with what I thought was an interesting example that I believe shows the potential complexity of the issue or should I say the lack of congruity in explaining the issue. First here are the results for the S&P 500 for the most recent bull market cycle and the down year of 2008 not including dividends. 2003 up 26.4%2004 up 9.0%2005 up 3.0%2006 up 13.6%2007 up 3.5%2008...

Connie Mack

Consuelo Mack articulated something interesting in the opening for this week’s show. She talked about the school of thought that says the best active managers tend to outperform in flat and down markets and lag during markets that are up a lot. If I followed her correctly she attributed this to Francois Trahan of ISI group and Smart Money magazine. It appears that this is something I am trying to emulate in how I perform the task and by extension this is what I write about here. So part of the equation comes from Ken Fisher’s idea of the market only doing four thing; up a lot, up a little, down a little and down a lot. If you miss a big chunk of that last one and go a long for the ride for the other three then you should come out ahead in terms of the entire stock market cycle. The breakdown of Consuelo’s observation might be as follows; in a flattish market it is easier to add value with things like increasing the overall dividend yield, country selection, sector weightings or other things that a given manager might focus on. When the market is down a lot some sort of defense trigger like going below the 200 DMA or the 50 DMA crossing below the 200 DMA or any other similar device can be a way to add value. However when the market goes up a lot it is typically because most of the big sectors are up a lot. If an entire sector is up 50% during some short period of time then chances are...

Connie Mack

Consuelo Mack articulated something interesting in the opening for this week’s show. She talked about the school of thought that says the best active managers tend to outperform in flat and down markets and lag during markets that are up a lot. If I followed her correctly she attributed this to Francois Trahan of ISI group and Smart Money magazine. It appears that this is something I am trying to emulate in how I perform the task and by extension this is what I write about here. So part of the equation comes from Ken Fisher’s idea of the market only doing four thing; up a lot, up a little, down a little and down a lot. If you miss a big chunk of that last one and go a long for the ride for the other three then you should come out ahead in terms of the entire stock market cycle. The breakdown of Consuelo’s observation might be as follows; in a flattish market it is easier to add value with things like increasing the overall dividend yield, country selection, sector weightings or other things that a given manager might focus on. When the market is down a lot some sort of defense trigger like going below the 200 DMA or the 50 DMA crossing below the 200 DMA or any other similar device can be a way to add value. However when the market goes up a lot it is typically because most of the big sectors are up a lot. If an entire sector is up 50% during some short period of time then chances are...