Hougan: 4 Lessons From ETF Strategists

The world’s leading ETF investors gathered in New York for a day. Here are four takeaways.

I recently returned from New York, where I attended ETF.com’s First Annual Global Macro ETF Strategist conference. It was a full-day event pulling together the largest and most sophisticated ETF investors in the world to answer one simple question: Where should people invest right now?

Everyone who is anyone was there. Windhaven, Riverfront, Clark Capital, Accuvest, Glovista, Globalt, Lazard, Cumberland … the list goes on. Even the individual all-stars were in attendance: Don Luskin, Dennis Gartman, Jim Lowell and so on.

There were a lot of potential takeaways from the event. But here are four that stuck with me.

Takeaway No. 1: The Best Idea Of The Day Is … Buy Aluminum?

I moderated the first panel of the day: an hour-long discussion among Cumberland Advisors’ David Kotok, The Gartman Letter’s Dennis Gartman and Advisor Investments’ Jim Lowell. Between the three, there is more than 100 years of investing experience, billions of dollars in assets under management and large staffs of researchers.

The panel covered a lot of ground, focusing mainly on Federal Reserve policy. At the end of the session, I asked each panelist for his single best investment idea for the coming year. I expected answers like Spain, emerging markets or even long-term Treasurys.

Instead, I got aluminum.

Aluminum?

Dennis Gartman’s esoteric choice was surprising, but the logic was sound. No matter how pessimistic you are about China and other emerging markets, people there are going to be buying more cars there in the next 10 years than they did in the past 10.

And no matter what your view is on the Environmental Protection Agency or global warming, there’s a massive push right now to increase the mileage of automobiles. Both point to more aluminum consumption.

There are two aluminum ETNs out there. Both are illiquid and difficult to trade. The iPath Pure Beta Aluminum ETN (FOIL | D-90) ranks ever so slightly better in the ETF.com Analytics system, so it’d be the play here.

Takeaway No. 2: The Second-Best Idea Is … Health Care?

Jim Lowell followed Dennis Gartman in answering my question, and he gave a nearly equally esoteric answer: health care.

Health care?

The call had nothing to do with Obamacare or biotech buyouts, the reasons du-jour to like health care. Instead, Lowell was also thinking big picture. Here’s the logic: No matter what you think about emerging markets as an investment, the people there are getting richer. As they get richer, they will demand more health care.

The best ETF for that idea is the iShares Global Healthcare ETF (IXJ | A-88), our Analyst Pick in the global health care segment.

Gartman’s and Lowell’s picks are interesting in isolation, but they’re more interesting in the aggregate, for two reasons:

1. They spring from the same source: Investors have soured on emerging markets as a stand-alone investment, but the long-term theme of rising wealth in the developing world clearly has taken hold.
2. They’re both so odd. Anytime people reach as far as aluminum for their best idea, it makes me wonder if we’re near a top.

Takeaway No. 3: No Consensus On Fixed Income

In contrast to the long view on emerging-markets-related themes, there was absolutely no consensus on what to do in fixed income. A year ago, everyone I spoke with told the same story: It was time to shorten up on duration and take on a bit of extra credit risk. After watching one of the greatest rallies in the long bond in recent memory, people are now much more circumspect.

For every investor who was selling out of fixed income and shortening up substantially on duration, there was another one buying the 30-year bond. Perhaps Sage’s Anthony Parish had it right when he said: There’s always a bond bull market somewhere, and you just have to find it.

I got a real sense that many advisors are throwing up their hands and saying, “Why bother?” Yes, bonds are important. And yes, there have been some fantastic returns recently. But there was a palpable exhaustion in the audience regarding looking at the bond space and finding something attractive. People seemed to be out of fresh ideas.

Takeaway No. 4: The Hard Questions About Tactical ETF Investing

The people we had speaking at the conference were exceptionally smart, thoughtful and articulate. I find myself seduced whenever I listen to them, wanting to hand over my money to their careful stewardship. A lot of them do great work for investors.

But as I went through the day, I couldn’t help one thing in the back of my mind: These strategists haven’t repealed the laws of active investing. After expenses, the majority of these strategists will likely underperform the market as a whole.

The best strategists didn’t shrink from this challenge. There was a good discussion of the topic of “benchmarking,” with many arguing that benchmarking them to any single index was passé … that they should be benchmarked to client outcomes. Others seemed ready for the absolute challenge of outperformance.

I continue to think that the greatest investor of my generation—the one that will be venerated on the covers of Forbes, Fortunes and other old-school publications—will be pulled from this lot of so-called ETF strategists, using broad-based ETFs to implement macro strategies in the market.

The question is, How many other strategists will pile up in the wreckage as the top performers emerge?

It will be interesting to watch.