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Paul Britt Analyst Blogs

Inside ETFs: A Reality Check



The challenge grows harder when an advisor wins new business and needs to take measure of the new client’s portfolio—a task that might well involve poring through lists of unfamiliar tickers all reported as “equity.”

I’m no expert on the reporting function in portfolio management software. My only point here is to give voice to the most common complaint that I heard at our conference in Florida. I found it interesting simply because I spend so much time diving deeply in the ETF world, so I need to be reminded of the working reality of holding ETFs in an everyday portfolio.

The Universe Is Expanding

As I headed from a panel on VIX-based funds to a panel on inflation, a VIX panelist wondered aloud whether there was any inflation to worry about. His point was that while volatility ETFs were incredibly relevant in 2011, domestic inflation seems like a nonissue in the short run.

As it turned out, the inflation panel was well attended.

The beauty of the expanding world of ETF choices is that those with differing views have powerful tools at hand.

Volatility funds abound, with front-month, midterm, levered and inverse exposures to choose from. In the same vein, investors worried about inflation can fight it using TIPS, commodities or real estate funds, or with funds that explicitly target inflation.

The point is that investors and advisors have an ever-increasing toolbox to execute tactics and strategies consistent with their worldview and their needs. This ETF toolbox expands the opportunity set, and makes the efficient frontier more pliable for investors of all stripes.

But, unlike the children in Lake Wobegon, most funds are not above average, whether in value or performance.

Now that I’m back in my ivory tower, I realize more than ever that the growing ETF options in the market don’t automatically translate into advisors knowing what’s at their disposal or what exactly to do with the new products.

So here’s to being more clear and more direct, even as the world of ETFs grows bigger and more complex.



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