ETFs-Know When To Hold ‘Em and When to Fold ‘Em-MarketsMuse

MarketsMuse ETF update profiles the risks associated with tact-strategists over-trading exchange-traded products and the costs associated with using ETFs as trading products vs. investment products. Below extract is courtesy of Jason Zweig WSJ Weekend edition.

When hiring people who call themselves strategists, be aware that some act more like tacticians instead.

That is one lesson from several recent setbacks among ETF strategists, asset managers who specialize in picking exchange-traded funds—those popular investment baskets that mimic market benchmarks like the S&P 500-stock index or the Barclays U.S. Aggregate bond index.

Until recently, ETF strategists have been sizzling hot. By March 2014, they had garnered $103 billion in assets, up from $44 billion at the end of 2011. But assets slid to $91 billion at year-end 2014 and likely dropped further in the first quarter as disappointed investors pulled money out, says Ling-Wei Hew, an analyst at Morningstar, the investment-research firm.

Some strategists, such as Vanguard Advisers, a unit of the giant Vanguard Group, and Ibbotson Associates MORN -0.43%, a subsidiary of Morningstar, bundle ETFs into highly diversified portfolios that they patiently hold.

Yet other strategists rapidly trade from one ETF to another, from ETFs to cash or from cash to ETFs. That is more tactical than strategic. When they think a market is about to go down, these tacti-strategists will move to cash; if they are bullish, they will get out of cash and back into ETFs. While such trading could limit your losses during bad markets, it often comes at a high price in the form of annual management fees and other costs that can exceed 2%.

Such strategists may manage bundles of ETFs in separate accounts, advise mutual funds or even just sell their recommendations of when to trade which funds to financial advisers.

“Financial advisers have a real appetite for this kind of product right now, since it enables them to spend less time managing portfolios and more time managing the relationship with their clients,” says Jennifer Muzerall, a senior ETF analyst at Cerulli Associates, a financial-research firm based in Boston.

But can anyone reliably beat the market with funds that are designed only to match the market?

This past week, Hartford, Conn.-based Virtus Investment Partners VRTS -0.32%, which manages $55 billion in mutual funds and other assets, removed ETF strategist F-Squared Investments as an adviser to five Virtus funds.

The largest of them, now known as the Virtus Equity Trend Fund, underperformed the S&P 500 by at least two percentage points annually the past four years in a row; last year, it lagged behind the market by 11.9 points.

To continue reading the entire column by Jason Zweig, please click here