Adding value to ETF portfolios; how money managers use ETFs; and panic over Greece

By Dan Hallett, CFA, CFP on May 25th, 2010

In a recent blog post, I warned that advisors may face investment, competitive and/or compliance challenges when using ETFs in a fee-based account for clients.  In the May 2010 issue of Investment Executive, I took the opposite side of the issue by detailing how diligent advisors can add value to fee-based ETF portfolios.  Advisors aren’t the only segment of the industry making greater use of ETFs.

Actively managing ETFs

Money managers also appear to be making more use of these popular products.  In a recent Globe & Mail article, I noted that this is partly because the number of ETFs has exploded in recent years.  My earliest recollection of mutual fund managers using ETFs dates back to BPI Global Asset Management of Boca Raton, Florida in the mid-to-late 1990s.  They routinely used ETFs to mop up excess cash while they searched for stocks to buy – a practice still in use today by many firms.  Then, in 2001, Spectrum Investments (later acquired by CI) launched Spectrum Tactonics– which used technical analysis to trade in and out of North American ETFs.

With a wider array of new ETFs came broader uses of ETFs by money managers.  The likes of Christine Hughes (formerly of AGF), Frank Mersch and Eric Sprotthave used some of the short ETFs available on the U.S. market as part of their permitted short exposure.  And a few funds, like BMO Guardian Global Absolute Return, have long included the SPDR Gold ETF (or something similar) among its top holdings – as a more efficient way of holding bullion.

Panic over Greece

Gold bullion is becoming increasingly popular.  But gold’s price ascent is not the result of booming industrial or commercial demand.  It’s because of soaring investment demand fueled by fears that high government debt will devalue paper currencies across the globe.  Indeed, the situation in Greece (and the EU) recently caused markets to go haywire – which tends to give investors a nudge.

When markets hit a euphoric high, investors become disenchanted with bonds and feel that their bonds and cash can be more productive in soaring stock markets.  When we get days like May 6, 2010 investors start to wonder if they should dial back their stock allocation and stuff the proceeds into safer bonds and cash.  And so it goes.  Accordingly, my advice in this recent National Post article was essentially to sit tight in light of the panic over Greece.  Some might question such advice but selling into a panic has rarely proven to be a good move.  With elevated valuations, risk is higher than it was a year ago.

But this is not reason to panic unless investment strategy doesn’t line up with an investor’s short-, medium- and long-term goals.  Rocky stock markets simply lend more merit to the goals-based approach to investment strategy design that HighView espouses, which matches assets to future spending liabilities in the context of a client’s respective time horizons.  And when funding of future liabilities is on track, it becomes easier to navigate the market’s wild swings.