iBillionaire ETF Buyers: Beware Of Bear

August 11, 2014


Charts courtesy of Bloomberg

You’re starting to see the appeal of “anything but market cap” in a bull market. Every one of these strategies beat the pants off the S&P 500 over the five-year window, with iBillionaire on top. I don’t find that particularly surprising—the index was only introduced in November last year, and let’s be honest, nobody has ever introduced a “smart” index that looks bad on the backtest.

But I’m left with more than one concern:

The first is simply that I remain, as always, enormously skeptical of active management. IBLN certainly looks good on paper right now, but it hasn’t actually been tested in a live bear market.

And the thing you’d expect these “wise men” to do if they were really geniuses managing your money would be to get out of a falling market faster than everyone else—precisely what IBLN cannot possibly do, since it’s dealing with data lagged from these gentleman by 45 days through the 13F filing process.

The second is that I’m not convinced folks will understand that a significant portion of the “magic” here comes from simply equal weighting a large-cap portfolio. That magic serves mostly just to boost the beta of the underlying selection of stocks.

That works great in upmarkets, and can really hurt in downmarkets. In the terrible year leading up to the March bottom in 2009, for instance, equal-weighted S&P underperformed the S&P by an extra 5 percent—rough justice in a period where the S&P was down 45.5 percent already.

My prediction, however, is that despite all the snickering, we’ll continue to see strong flows into IBLN, GURU and their inevitable copycats. No matter how many regressions I run, or how many statistics I can trot out, nobody wants to be average, and the belief that the rich guys must be smart is so fundamentally American that it’s an easy sell.

At least when the market’s up.



At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected].

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