Sunday, August 13, 2006

Agitation over enhanced ETFs

There's an unruly crowd hanging out on the 'net right now, at the corner of Financial Street and New Products Way.

Seems that this crowd is getting upset, persnickity even, over whether enhanced ETFs, are going to fare better in the long haul than conventional ETFs. That is, ETFs that track the standard market indices.

Of course, many in the crowd are muttering that no one can be absolutely sure they'll outperform, and therefore, *stay away*.

"These is dangerous times, friends, they say, and dangerous products. Beware."

But not to worry, friends, the sheriff has just pulled alongside, and told them agitators to cool down. The sheriff points out to them that most of these product concepts have been backtested and, anyway, many of the enhancements are simply based on writing rules for, and then computerizing, superior investment behaviour.

That is, he tells them ...
Exploiting market inefficiences, and doing things well-known to enhance returns, like buying stocks that have cheap valuation metrics. And this type of 'nvestment behaviour is likely to be rewarded long into the future. So calm down folks, calm down.

Remember, even the now lowly index funds were once considered newfangled and there were many who doubted their ability to outperform 'ventional mutual funds, despite extensive
the sheriff slows his speech to a crawl and gesticulates quotation marks for those slow in the crowd
"back-tested" research that showed that 80% of mutual funds didn't beat the index after just a five year period.

Investing in back-tested enhanced ETFs is jest smart 'nvesting. Jest smart 'nvesting. And there's nutin' wrong with that, is there folks?
The crowd disperses. Most walk away, figgering the party's over. A few walk away, muttering 'bout the good old days. A few go looking for the brains behind these new products ...

... and think they see him ...

But the wisest quietly head to the nearest internet cafe, for a quick round of research, and portfolio re-balancing with these new enhancements.

And thus things are as they always were ... angst over something newer AND better ... and the sheriff walks away ... peace restored once again.

Enhanced ETF - US example, Canadian example.


The Confused Capitalist

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