Winning With ETF Strategies: Top Asset Managers Share Their Methods for Beating the Market

ETF has become increasingly popular over the past decade, for good reasons. Even for professionals, it offers access to some assets previously difficult to trade. For the general public, it is much cheaper and more convenient than conventional mutual funds, and much easier to short.

The first half of this book introduces ETF and some general background information on market dynamics. The second half contains short descriptions of many fund managers’ ETF strategies written by themselves. Buzzwords are plenty and real information density is low, particularly in the second part. But overall, a layman should still get some useful advice out of this book. Just don’t expect to beat the market on any publicly available information or ideas. The goal here is to increase access and lower trading cost. For these realistic goals, ETF is indispensable, even for the pros.

This ETF introduction book has 8 chapters, but the last chapter takes more than half of the 230 or so pages! By the way, I received a paperback book, not hard cover. I found the first 7 chapters which cover the basics of ETFs, confusing. The author does not write well. I’m a good reader, not a speed reader but a thorough reader, and I found his writing difficult to understand. I often had to re-read the same sentence several times, something I rarely do when I read, except when I read in Spanish! The last chapter interviews a number of money managers who use ETFs, but I kept asking myself are these guys really revealing their trading strategies? Actually another question I kept asking, and which made me rather skeptical of the materials here, was are these guys even remotely successful? But, really, the problem here is, the materials simply lack focus. After reading fewer than half of the interviews, I bet you’re gonna feel a overwhelmed and not sure what strategy or strategies would really work. I think the title “winning with ETF strategies” is too much of an oversell! The author does not achieve the goal stated in the book.

This is a good book from an ETF standpoint as well as interesting investment information. I thought chapter 2 on how markets move was important in elucidating bull markets, bear markets and sideway markets as well as sector analysis and asset allocation. I was impressed how concise and clearly this chapter is written. It enhanced my understanding of these familiar topics. I also thought the authors decision to choose the topic of equal weighted indexes vs cap weight indexes was a good idea. Again, the author is lucid in the explanation of this important topic. I think the first seven chapters to be worth the purchase of the book. The final chapter is longer than the first seven chapters combined and discusses specific firms/financial advisors/money managers. This chapter must have taken a tremendous amount of research, however there are no tables or listings to compare different asset requirements for investors, investment styles, etc. This long final chapter is compilation of a narrative of each firm with their investment approach which in many cases was difficult to discern exactly or proprietary. It gives the investor considerable information however the reader would have to read about each company and take notes and make their own tables to compare the offerings. Nonetheless, obtaining this encyclopedia of ETF asset managers is readily available in this book.
More information about ETFs e.g. ETF web sites, as well as new ETF offerings that offer creative asset allocations would be of interest. My copy of the book had no index which it needs.

I almost never give one star reviews, but this book is one of the rare exceptions. From the subtitle (Top Asset Managers Share Their Methods for Beating the Market), I expected this would be if not a Market Wizards: Interviews with Top Traders for ETF managers, at least some thought-provoking interviews with outstanding ETF asset managers.

The book is actually something quite different. The first third of it is a basic primer on ETFs. For someone who has little knowledge of ETFs and the debate between cap-weighted indices vs equal weight and fundamentally weighted ETFs this part could be helpful. However, you can get this material all over the internet and it certainly doesn’t break any new ground.

The final two-thirds of the book features “interviews” with “top” asset managers. I put “interviews” in quotes because these are anything but interviews. In reality they are little more than dull public relations puff pieces that could have been written by the firms themselves. In addition, the word interview implies some exchange of ideas, but here there is no question and answer, no back and forth, no real exchange of ideas at all. The sketches rehash virtually every investment cliche you’ve ever heard. I learned absolutely nothing of any interest whatsoever.

Finally, there is no mention or discussion of how these “top” asset managers were chosen to be in the book. There are no track records, no performance figures and nothing that leads one to believe these managers stand out in any way whatsoever. They really seem like random profiles of managers that can now claim their firm has been written up in a book as a marketing gimmick for potential clients. I’m sure there are some managers using ETFs in very creative ways. If so, they aren’t in this book.

This short book on ETFs is divided in two different halves. The first one covering seven of the eight chapters in the book is focused on two themes:

1) The assumed advantage of equal weighted or fundamental weighted indices over traditional market cap weighted indices; and

2) The advantage of extensive market timing in different investment sectors and asset classes facilitated by the broad universe of ETFs vs a traditional buy and hold strategy.

The second half of the book is an interesting survey of 23 different investment managers that use ETFs as their main investment vehicle to create various investment asset allocations.

The ongoing debate regarding indices structure is interesting. The author interviews advocates on the equal weighted or fundamental weighted side. Their main argument is that this approach ensures you don’t overweight stocks that have bubbled. They state that the top 50 stocks by market cap account for 50% of the S&P 500, and they consider that excessive. Their index structures correct that. They also state their index structures have greatly outperformed their market cap weighted alternatives.

The whole truth is not straightforward. Within the book, they often praise the Rydex S&P equally weighted index fund (RSP) as they state it has outperformed the S&P 500. However, the RSP is a completely different animal. Within the RSP the largest market cap has the same weight as the smallest one or 1/500th of the whole index. This gives the RSP a strong Mid and Small caps tilt. If you now compare the RSP performance to a Mid cap index fund (VSMAX) or Small cap one (VIMSX), RSP advantage disappears. Its performance is somewhere in between the S&P 500 and either a Small or Mid Cap index. That’s all there is to this.

Research Affiliates has structured some successful fundamental index funds (PRF for large caps and PRFZ for small caps). Within such indices the weight of a company is based on a combination of financial metrics including dividends, earnings, revenues, and book value. The idea is the same as for equal weighted index, and that is to avoid buying too much into a stock that has bubbled. Those indices have outperformed their market cap indices counterparts. But, this is an apples and oranges comparison. This index structure within the specific cap targeted gives it a smaller cap and value tilt. Also, those indices have benefitted from a larger weighting of the financial sector in March 2009 when that sector was dirt cheap during the financial crisis. As the financial sector recovered, the PRF indices really took off. If you compare the two graphs (Fig. 5-1 and 5-2 on pg. 44 and 45) you will notice that the fundamental index chronically concentrates on lower valuation sectors such as financials and utilities and is much less invested in higher valuation sectors such as technology and health care. But, that is not always a good thing. Google P/E ratio will always be higher than PG&E. And, there are many valid reasons for that such as earnings growth. This does not mean Google is systematically overvalued relative to PG&E. At times, the opposite may be true.

Also, early in the book there is the allusion that some ETFs are “intelligent” as companies have designed indices that would beat their respective benchmarks through a mysterious synergy of stock composition. PWC is such an “intelligent” ETF. For the first two years it did outperform the S&P 500 only to underperform it steadily since 2006. Yet, the author suggests PWC has outperformed to this day (pg 9). It has not.

This whole debate about index structure deserves further studying. If you are interested to do so, I recommend Robert Arnott The Fundamental Index: A Better Way to Invest on the proponent side. And, on the rebuttal I suggest excellent papers: “Fundamentally Flawed Indexing” by Andre Perold and “Let’s Not All Become Fundamental Indexers Just Yet” by Paul Kaplan.

Moving on to the section on market timing and sector rotation, the advice is poor. On page 26, the author shows what a fortune you would have generated if you had invested in the S&P 500 since 1966 and had somehow miraculously avoided in each single year the worst 5 trading days. Similarly, on page 19 the author shows a table that discloses how much the yearly return of ten different asset classes diverged during the past decade. This entails how well one could have done by investing in the asset classes that fared better in every single year. The section heading is: “The Importance of Picking the Right Sectors.” Within this same section, the author states “There are many ways to use ETFs to profit from the difference in sector performance.” To think that one has the foresight to move in and out of 10 different asset classes with perfect timing from year-to-year is as delusional as believing one can precisely avoid the 5 worst trading day of the year of the stock market.

The second half of the book is a survey of 23 different investment managers that use ETFs to design asset allocation portfolios for their clients. These managers rely on complex proprietary asset allocation models. So, their investment method is not replicable by the retail investor. It is unclear how successful these investment managers have been. Numerous have less than $200 million under management or have just started a few years ago. Cedar Winds and Global ETF Strategies started in 2004 and Monument Wealth Management started in 2008. None of their investment record is public. So, they can make unverifiable claims regarding their excellence. One exception is Long View that created its own ETFs: Long View Global Allocation Fund (LONGX). So far it has widely underperformed a simple strategy (60% equities/40% bonds VBINX).

Throughout the book, there is a cult of complexity promoting the merits of investing in a bunch of exotic asset classes such as currency, commodities, and small emerging market cap. Diversifying across US stocks entails investing in numerous indices (large, small, mid cap, etc…).

Having been a student of capital markets for decades I feel this cult of complexity is over hyped. I don’t see much benefit for the retail investor in investing in all those exotic instruments. Who needs to take on currency risk or accounting risk with poor disclosure in emerging markets? Also, splitting out US indices into three separate asset classes adds no value. Instead, one is better off investing in a single large well diversified index such as the Wilshire 5000. If you had to invest in a single fund, you could do worse than simply investing in the mentioned VBINX (60%/40% equity/bonds). Also, the concept of sector rotation is a losing proposition for most investors. One’s probability of moving out of an asset class at the wrong time is probably greater than 50%.

If you want to invest successfully and simply I recommend the excellent The Random Walk Guide To Investing . It will offer you better advice than this book.