ETF Strategists Turn Beta Into Alpha

June 05, 2014

"About five years ago, I would spend all my time—people would always be raising their hands—explaining what an ETF actually is," said Tyler Mordy, president and co-CIO of Hahn Investment Stewards, an ETF strategist firm based in Toronto with about $500 million in assets under management, all of it in ETFs.

Worse yet, practitioners using ETFs have found themselves defending the ETF, all while trying to explain its potential to democratize access to global financial markets. As recently as three years ago, the influential Kauffman Foundation raised alarms about how ETFs had tail-wagging-the-dog potential that posed a threat to the financial-market stability on days of massive asset flows.

"There were so many naysayers of the ETF vehicle, and reports on systemic risk—all of which were based on thoroughly misguided analysis," Mordy recalled. "But now that investors are more educated, we're entering what I call 'Act II,' which is about process and an exploration of the investment approaches using the ETF vehicle."

"We're moving from traditional asset classes to things like risk-factor analysis. So you might say, for example, 'my portfolio is overweight inflation,'" he said, stressing that such shifts in how to build portfolios are directly related to the emergence of the ETF. "But similar to stock pickers falling in love with a stock, we can't as asset allocators allow ourselves to get hooked on an asset class."

"The stock-picking gurus are declining in importance, and—having been on television—I find the topics of discussion are now refreshingly big picture. I don't much talk about Walmart anymore; I talk about things like what's going on in China," Mordy added.

A few episodes along the way have helped the cause of ETFs and of ETF strategists, including the mutual fund market-timing scandal of 2003, and even the financial crisis.

In the first case, the transparency of the ETF was held up as a viable way to steer clear of the opacity and shenanigans of mutual funds. A number of mutual fund firms were charged by U.S. regulators with trading after hours in and out of mutual funds on behalf of large clients to help themselves at the expense of smaller, long-term clients.

Also, in the aftermath of the 2008-2009 market crash, the low costs of ETFs relative to mutual funds and hedge funds have become clearer and much more attractive to investors shaken by two bear markets in the first decade of the 21st century.

 

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