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Amid Uncertainty, It’s OK To Be Boring |

Amid Uncertainty, It’s OK To Be Boring

September 30, 2014

When you’re really not sure what’s going to happen next, a few cheap and liquid ETFs may do the trick.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by Larry Whistler, president and chief investment officer of Buffalo, N.Y.-based Nottingham Advisors.

A recent snap investor survey conducted by Strategas Research Partners brought to light the great chasm in terms of the market outlook that exists today within the professional investment community. A conundrum? We think not, and here’s why.

We think it spells an opportunity to deploy a bit of cash to the core using inexpensive and highly liquid funds like the iShares Core S&P Total US Stock Market ETF (ITOT | A-100), among others.

But before looking at more ETFs that might be appropriate choices, let’s look at the results of the survey.

The table below summarizes the results compiled from 689 respondents:

Investor Survey Results - Next 12 Months
Data Point High Low Avg
S&P 500 2500 1350 2047
10-Year Treasury Yield 4.25% 1.50% 2.95%
Fed Funds Rate 2.00% 0.00% 0.40%
WTI Crude Oil $150 $75 $99
Source: Stategas Research Partners, 689 respondents

Split Decisions

While the survey was fairly straightforward, the conclusions reached are anything but. Equally seasoned professionals, it could be argued, see the S&P 500 Index either rising 25 percent over the next 12 months, or falling 33 percent! The average response was for the S&P 500 to record a meager gain of 2.3 percent. This isn’t exactly a consensus call, to say the least.

Within the commodity arena, crude oil is seen to be priced anywhere from $75 to $150, with a mean price of $99—not too far off today’s level. What this means is that the “average” professional investor doesn’t see the price of oil changing much over the coming year. However, the return distribution suffers from some fairly fat tails.

And it’s not only in the equity/commodity arena where the differences lay. The range of estimates for the 10-year bond yield a year from now extends from a low of 1.50 percent to a high of 4.25 percent. Even the average response of 2.95 percent shows a large difference from today’s level of 2.49 percent.

The bet on Fed Funds a year from now ranges from zero percent to 2.00 percent, with an average of 0.4 percent, or 40 basis points.




Low-Conviction Environment

What this survey highlights—and it’s likely not a surprise to many—is that forging any kind of consensus opinion in this market is exceedingly difficult. High-conviction trades, at least to us, are few and far between.

The list of “uncertainties” extends from tea-leaf reading at the Federal Reserve and the European Central Bank to heightened geopolitical tensions around the globe to concerns surrounding an overly extended stock market to memories of the 2008 debacle that is still fresh in investors’ minds.

So, what’s an individual investor expected to do when the supposed investment cognoscenti can’t quite agree among themselves? Sometimes it makes more sense to stand still, or to take a step back, rather than take an uncertain leap ahead.

Putting Boring Into Practice

What this means in portfolio management practice here at Nottingham is that absent a high-conviction tactical trade idea, we think investors should retreat to beta and wait patiently for the next opportunity.

Despite today’s low volatility, opportunities will arise in some asset class some place around the globe. And if you have some “dry powder,” you’ll be in a great position to take advantage of a temporary price dislocation.

To us, today’s market sure seems like one of those times.

Bond yields have dropped lower for much of this year, making fixed income even less attractive, while equity markets have recovered valiantly from recent pullback to forge new highs. Devotees of Shiller’s CAPE ratio or “Tobin’s Q” can be heard fretting about the historically high valuations today, adding to worries about a pullback.

Rather than pursue low-conviction ideas with client dollars, why not revisit one’s core allocation, add to the “beta trade” with a low-cost broad index ETF and await an opportunity to pursue a new tactical idea?


Best Domestic ETF Choices

What ETF best fits one’s core or strategic allocation depends on the strategy objective as well as the established benchmark against which that strategy will be measured. The idea here is to be as benchmark neutral as possible, without introducing an unintended style drift or sector tilt. While fundamentally weighted ETFs can add value at times, under these circumstances, we’re looking more to traditional cap-weighted indices.

Subsequent, but equally important, considerations include ETF trading costs, liquidity, expense ratio and portfolio fit. Given the inherent short-term nature of this position, we at Nottingham tend to favor highly liquid ETFs that can be bought and sold in size with little market impact. Expense ratios, while important, tend to be a secondary consideration due to the relatively short intended time horizon.

For example, a good domestic equity placeholder might be the SPDR S&P 500 ETF (SPY | A-98) or the Vanguard S&P 500 ETF (VOO | A-97). At Nottingham, the best benchmark match for our portfolios tends to be the iShares Core S&P Total US Stock Market ETF (ITOT | A-100),which gives us direct exposure to the S&P 1500 Index, against which we benchmark our domestic allocation.

All three options are highly liquid, usually trading with a 1-2 cent bid/ask spread, available in size and spot very low expense ratios.

International And Fixed-Income Choices

Looking internationally, the Vanguard FTSE All-World ex-US ETF (VEU | B-99) and the iShares MSCI ACWI Ex-US ETF (ACWX | B-98) provide broad exposure that includes developed and emerging market countries, while the iShares MSCI EAFE ETF (EFA | A-91) can provide highly liquid access to strictly developed markets. As with the U.S-focused ETFs mentioned above, all three of these are very liquid, trade in size and have low expense ratios.

Avoiding low-conviction tactical trades can extend to the fixed-income arena as well.

With aggressive valuations in both the high-yield and bank loan space currently, perhaps it makes sense to de-risk a little bit and hide out in something like the iShares Core US Aggregate Bond ETF (AGG | A-97) or the Vanguard Total Bond Market ETF (BND | A-93) for a while.

State Street also has a number of duration-specific ETFs that may match up well with the portfolio’s target duration.


Fund Name Exposure No. of Holdings Spread % 3-Month ADV Expense Ratio
SPDR S&P 500 (SPY) Domestic Equity 503 0.01% 83,936,000 0.09%
Vanguard S&P 500 (VOO) Domestic Equity 510 0.01% 962,775 0.05%
iShares Core S&P Total U.S. Stock Market (ITOT) Domestic Equity 1,504 0.04% 82,084 0.07%
Vanguard FTSE All-World ex U.S. (VEU) International Equity 2,396 0.02% 863,319 0.15%
iShares MSCI ACWI ex U.S. (ACWX) International Equity 1,159 0.05% 287,900 0.34%
iShares MSCI EAFE (EFA) International Equity 905 0.01% 13,005,427 0.34%
iShares Core U.S. Aggregate Bond (AGG) Domestic Fixed Income 2,709 0.01% 1,200,783 0.08%
Vanguard Total Bond Market (BND) Domestic Fixed Income 16,027 0.01% 1,767,411 0.08%
Sources:, Bloomberg

Boring Can Be Better

When it comes to the beta trade, sometimes “boring is better.”

Rather than sacrifice liquidity to reach for some incremental yield or a nuanced fundamental index, remember why you’re buying the ETF in the first place—as a placeholder. The time will come when fundamentals will change or the market will riot or a country-specific opportunity will arise, such as Portugal, recently.

At that point, you’ll be able to cheaply and easily sell the interim ETF and reinvest proceeds into a new tactical trade.

Profitable tactical trades can be hard to come by under favorable circumstances.

In today’s fully priced markets, we feel it’s especially hard to develop a high-conviction tactical trade idea. Rather than risk negative alpha, it can be better to add to the core and be patient. Calm markets rarely last long; so enjoy them when they’re here, but be in a position to act when opportunity strikes.


At the time of writing, Nottingham owned shares of SPY, ITOT, VEU, ACWX, IEFA, AGG and BND on behalf of clients.

Nottingham Advisors is an ETF strategist that manages and advises on more than $1 billion in assets for advisors, institutions and individuals. Nottingham has been using ETFs since 2001 and currently offers five unique strategies with focuses on risk-based total return, current income and real return. To learn more, visit or contact Nottingham directly at 716-633-3800. For all relevant disclosures, please go here.

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