Buckley: 4 Ways Advisors Control Alpha

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January 27, 2014
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Ignore the hype and concentrate on the ways you can control alpha, Vanguard’s Buckley says.

Investors and advisors, who regularly face an onslaught of competing claims about how to achieve outperformance, have four bona fide ways to enhance returns, including behaving properly in adverse market conditions, being tax savvy, keeping costs low and rebalancing, Vanguard’s Chief Investment Officer Tim Buckley says.

In sum, these four ways of truly controlling alpha can amount to about 3 percentage points, or 300 basis points, of return each year, Buckley told advisors and investors at ETF.com’s 7th annual Inside ETFs conference. One hundred basis points are equal to 1 percentage point.

“That’s the alpha we truly believe you can control,” Buckley said on Monday to an audience of several hundred advisors and other investment industry professionals. The four-day event, with more than 1,500 attendees, is the world’s biggest ETF conference and the see-and-be-seen industry event.

Breaking each of the elements down, Buckley said being a “great behavioral coach” is probably worth 150 basis points of excess return each year. The Vanguard executive was referring to disciplines such as keeping invested when markets turn lower and continuing to put money into the market.

He estimated that being tax savvy might be worth another 60 basis points a year, while keeping costs low and rebalancing are worth 50 basis points and 40 basis points a year, respectively. Again, the four practices are worth an estimated 300 basis points a year—not a trivial amount over the arc of time.

“Whether you go for broad market exposure or go after factors, there’s no reason to go for high-cost funds,” Buckley said, preaching the quintessence of the Vanguard gospel that has helped make the Valley Forge, Pa.-based company the biggest mutual fund firm in the world, with about $2.3 trillion in assets.

Buckley was speaking on the second day of the Inside ETFs conference, which comes at a time when total U.S.-listed ETF assets are now about $1.7 trillion, just shy of a record, according to data compiled by ETF.com.

According to ETF.com estimates, ETF assets are likely to reach $15.5 trillion by 2023, at which time they are also likely to match assets in mutual funds. Current ETF assets remain below the $13 trillion in mutual funds or the $6 trillion in hedge funds.

San Francisco-based ETF.com, the leading provider of ETF news, data and research, is now offering institutional-quality ETF research and analytics for free. However, investors and advisors can still subscribe to the “ETF.com Premium” service, which includes access to our ETF analysts, the Alpha Think Tank and other benefits.

 

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