Questions about Oxford Wealth Accelerator – my new exchange-traded fund (ETF) trading service – have been pouring in.
Clearly, you are curious about ETFs and what they can do for you in today’s tough markets.
As I’ve noted before, the service’s Tactical Portfolio focuses on generating ultra-short-term gains (holding times average six to 12 weeks).
And it can generate these gains not only in U.S. stocks but also in foreign stocks, commodities and currencies.
With its short-term focus, the Tactical Portfolio is similar to the portfolios of other Oxford Club trading services.
So if you’re an active trader willing to take on some risk, the Tactical Portfolio is for you.
Today, however, I want to focus on the Strategic Portfolio and its purpose in Oxford Wealth Accelerator.
First, the Strategic Portfolio is not designed for active trading.
Instead, it is a portfolio you need to adjust only three or four times per year.
The portfolio consists of 10 investment strategies, each of which has a historical track record of beating the S&P 500.
(That’s why I like to think of the Strategic Portfolio as a “portfolio of strategies.”)
Each of these strategies is represented by a single “smart beta” ETF.
Each smart beta ETF tracks an “alternative index” based on specific factors.
These factors can include value, momentum, size, quality and even low volatility. Other ETFs implement strategies that buy high-dividend stocks or invest in companies that buy back their own stock.
Both theory and practice confirm that many smart beta ETFs outperform traditional market cap-weighted indexes.
I believe smart beta ETFs are a better alternative to active managers for two reasons.
First, active money managers, on average, have not delivered on the promise of beating the market.
According to Financial Times, an astonishing 99% of actively managed U.S. equity funds trailed the market from 2006 to 2016.
Explanations for this remarkable underperformance range from high fees to excessive trading to outright lack of skill.
Whatever the reasons, active managers just aren’t cutting the mustard.
Second, smart beta ETFs don’t rely on the smarts of their managers.
Instead, they are managed on the basis of transparent and quantitative methodologies.
This mechanistic approach both lowers the total cost of investment and improves performance.
Smart beta ETFs also generally charge lower fees compared with actively managed mutual funds.
According to Morningstar, the average ETF expense ratio in 2016 was 0.23%, compared with the average expense ratio of 0.73% for index mutual funds and 1.45% for actively managed mutual funds.
That lower cost alone gives ETFs a massive performance edge.
But it’s in their abundance of strategies that smart beta ETFs really shine.
Today, there are more than 1,025 smart beta ETFs trading on the U.S. stock markets.
Some ETF strategies – like ones that employ artificial intelligence – are new.
Others – like the ones that track the S&P 500 Equal Weight Index – go at least as far back as 2003.
Of course, the question remains…
How do smart beta strategies fare in practice?
A team at investment bank Credit Suisse recently tested several factors to see whether they outperform in the real world.
The researchers focused on five of the 316 factors that have been around for more than three decades.
These five factors were size, value, income, momentum and volatility.
So which factor performed the best over the past 10 years in the U.S. stock market?
Well, the real-world answer is less than clear-cut.
Overall, low volatility was the best-performing factor between 2008 and 2017.
During this period, low volatility produced a return premium of 6.2%. This was followed closely by size at 2.8% and income at 1.9%.
Value trailed the market at -2.7% and momentum at -4.9% (though momentum had some big years, outperforming the market by a whopping 42.4% in 2015).
No smart beta investment strategy will work all the time.
Even strategies that have the strongest track record will work best at different times in the market cycle.
That means, ideally, you should diversify across multiple investment strategies over time.
So if you’re interested in market-beating strategies you can invest in at the click of a mouse…
ETFs are a great place to start.