As the saying goes, “the only constant is change.” That very much applies to investors as a group who are largely taking a different approach to selecting investments than in the past and it goes a long ways towards explaining the growth of Smart Beta ETFs. Specifically, today’s investors are placing much less emphasis on gut instinct and much more on science and mathematics. From Josh Brown (Fortune):
Individual investors have also helped foster the idea of “smart beta”, which in previous eras we’ve referred to as factor investing—the isolation and selection of stocks with specific characteristics, like high dividends or superior earnings quality. While you haven’t shown much interest in stock picking, you’ve clearly demonstrated a desire to own stocks that have the ability to outperform the market. The difference is that you prefer to go about this pursuit systematically rather than follow the calls of gurus or Wall Street’s analysts. This shift is a fitting analog for what’s happening in the outside world, a growing belief in processes that are repeatable, an emphasis on science and mathematics over art and gut instinct. In the last few years, retail investors pushed an astounding $382 billion toward smart beta index ETFs from such purveyors as WisdomTree, Invesco Powershares, and the AlphaDex series from First Trust.
Furthermore, it has been well documented that investor greed has been slow in returning after the financial crisis of 2008-2009. I have spoken with very few advisors in recent years who have noted that they are seeing much excitement about the stocks market from their clients-even though the stock market has produced rather spectacular gains over the past five years. Again, I think Brown’s observations are on point:
The data is incontestable; you’re back in the market, even if you are reluctant about the decision.
You’re investing by rote these days, adding to index products while tuning out anything with even a whiff of the old stock market fever from the bull markets of the past. And you’re willing to entertain the possibility of market-beating returns, so long as the discussion is couched in the terminology of passive investing. Where possible, you’re opting for low-cost and low-conflict over pricey and high-minded.
There’s a lack of enthusiasm for investing in the modern era, but no lack of dollars coming into investment accounts. This reticence, I should add, comes despite one of the longest bull markets for stocks and corporate bonds in history—five years, seven months and counting.
There are no stock market heroes, no mutual fund kings, and zero new investing celebrities. The closest we come to anything like that would be Carl Icahn and Warren Buffett, who, at 78 and 84 years old respectively, are hardly what you’d call Tiger Beat material. Financial television ratings are at two-decade lows even as the percentage of your financial assets invested in the stock market are at 15-year highs.
As for our place in this move toward Smart Beta ETFs, we partnered with PowerShares over seven years ago to bring to market the first Momentum ETF (PowerShares DWA Momentum ETF, PDP). Some data points that speak to the success and growing acceptance of Momentum ETFs:
- PDP now has $1.3 billion in AUM
- PDP has outperformed the S&P 500 in 6 of the last 7 years
- Dorsey Wright has been hired to be the index provider for an additional 16 ETFs
- The body of knowledge of Momentum continues to expand, including this recent white paper by our own John Lewis
For those of you who are users of PDP or any of our other Momentum strategies—thank you! For those who may be considering adding it to your portfolios, the technical picture for PDP is shown below. It remains in a positive trend and is currently just a few percentage points from breaking out to a new buy signal:
Source: Dorsey Wright, 10/27/14
Fascination with the “star manager” seems to be fading and in its place there is growing demand for repeatable processes. The move to more systematic investment strategies plays right into the hands of an advisor who is well-versed in different Smart Beta strategies, and we believe that Momentum is one of the best in this category.
The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. The Momentum strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).
