Regular readers know that I love ETFs. This fairly recent invention has revolutionized investing for millions of people. Now I think we’re entering a new era of innovation.
Why?
Today we’re going to look at some new ETFs, just launched by the venerable Frank Russell Company. Unlike most new offerings, which are simply “me-too” products intended to fill in the sponsor’s product line, the new Russell ETFs do something different … and also restore something we once had but then lost.
Intrigued? Read on …
The Problem with Indexing
The first thing you need to understand is that almost all ETFs are designed to track an index. A few are “actively managed”, but they haven’t really caught on yet. (They will, but that’s another subject.)
The advantage of having ETFs follow an index is that the portfolio is transparent. Everyone knows what is in the index, and therefore (more or less) what is in any ETF that follows it. This is not the case in mutual funds. At best, you’ll get a peek under the hood once a month, and maybe as little as every six months, and almost always with stale data.
The disadvantage of this structure is that most ETF managers have very little discretion. If the index includes some ugly, low-performing stocks, the ETF has to own them anyway.
Some people — the so-called “efficient market” fans — think it is a good thing to handcuff the managers because they’re convinced active managers never add value. They subscribe to the theory that index funds with low expenses are the best investment options no matter the circumstances.
Well, I like index funds, too. But back before ETFs came along, I found success rotating my mutual fund portfolio between the various active equity management styles. Sometimes the “earnings momentum” strategy was best, while other times I would be better off in a “growth at a reasonable price” fund or an “equity income” fund.
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| Peter Lynch pursued a ‘Growth at a Reasonable Price’ strategy in the 1980s when he earned his fame running the Fidelity Magellan fund. |
In the 1990s, mutual fund companies started imposing penalties on what they considered “short-term” investors who doubted the “buy and hold forever” philosophy. ETFs were invented, in part, to resolve this conflict.
It worked pretty well. Dedicated long-term investors stayed in mutual funds that welcomed them. Active investors (like me) started using ETFs that welcomed us.
In the process, however, we active traders lost access to some active equity strategies: Those not easily tied to an index. Now Russell is trying to restore this ability with a slew of new ETFs.
Russell studied many equity managers and found that while their approach to investing was considered active, most of them followed a fairly strict selection process. In fact, they found many strategies strict enough to be defined by rules that could be transformed into indexes that mimic active investment disciplines.
Russell calls these new funds the Investment Discipline Index ETFs. Here’s the complete list:
- Russell Aggressive Growth ETF (AGRG) buys companies expected to have above-average near-term earnings growth. This is often called an earnings momentum strategy.
- Russell Consistent Growth ETF (CONG) focuses on companies with above-average long-term earnings forecasts and consistent historical earnings growth.
- Russell Growth at a Reasonable Price ETF (GRPC) selects stable companies that are moderately priced based on their long-term forecasted earnings growth relative to their price-to-earnings ratio (PEG ratio).
- Russell Contrarian ETF (CNTR) pursues companies that have consistently lagged the market and their sector peers. It tries to identify opportunities for the stock price to improve based on a low historical price-to-sales multiple.
- Russell Equity Income ETF (EQIN) focuses on companies that demonstrate the ability to pay a stable dividend.
- Russell Low P/E ETF (LWPE) buys companies trading at lower price-to-earnings (P/E) multiples relative to their prior level or their sector peers.
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| Russell is the company behind the indexes widely used by institutional investors. |
The headline in today’s column poses the question of whether or not it is possible to index active management. I believe the answer is yes, if it is “disciplined” active management. “Quant funds” is another way to describe them. However, once the investment style is quantified by a strict set of rules, manager discretion is no longer part of the equation.
This is a big deal — a much bigger deal than most investors realize yet. Word is starting to spread, though. Just last week, I was interviewed by a reporter from Barron’s who had many questions about Russell’s new ETFs.
It may take some time for interest to grow. But once investors and financial advisors realize how useful these ETFs are, they’ll jump aboard quickly. You’ll be way ahead of the crowd if you learn about them now.
Best wishes,
Ron
P.S. To see how I use ETFs to profit from ever-changing global market conditions with my International ETF Trader service, click here.
{ 3 comments }
I do not see the point of your headline question then being addressed. There are already Funds that do what you seem to be postulating. Your piece then just pumps the notoriously expensive and mediocre Russell Funds Products. That was so much the case and still so where IRA predators still sell baskets of Russell mutual funds to reap 12-b-1 fees and other incentives from Russell. So now they resort to ETFs? I do not know what the net expense ratios would be on these funds. As you suggest investors should become familiar with these funds, then they should also check on expenses. Over .65% in fees and you should be wary. But then that is exactly why they launch product like this so they can claim that there is active quant management going on to justify higher fees? Apparently then it is then the individual investor and their advisor (if they have one) that is to choose which of these funds to own and how to weight them. Coincidently the ETF MATH has just been launched. It seems that math wants to try and do this management work for the investor. The other ETF GTAA is also doing this. Then in the Open ended mutual fund category you get the these FundX Upgrader funds and they do a TACTX & TOTLX. There are also the bond weighted funds of similar strategy and objective QAI and ALT. Investors need to be cautious of these kinds of investments as they are often some structure that is a fund of funds. So there is the potential for a double fee structure. Once to the fund you own and then to the individual funds in the fund. If you are seeking ALPHA with LT market appreciation these types opf investments may very well prove superior to things that are even murkier in terms of costs and fees such as indexed and blended annuities. What is the strategy of how to invest if you used these Russell products? What kind of costs are involved? Or is this just a hook to get some business for a newsletter. A bait and switch tease?
The fees on these new ETFs are 0.37%, which is below your 0.65% warning level. All the ETFs and funds that you mentioned are actively-managed funds with much higher fees. These Russell ETFs are index based. That is why I posed the question in the headline and then answered the question in the article.
Here is a link to the Russell ETF website if you want additional info:
http://www.russelletfs.com/
I clicked and listened for a short time as it was explained what so and so has been. Well he is a has been then? At least put a timer on your stuff so we know whether we have time to go to the bath room or fix a snack before the sales pitch gets to anything worthwhile. I have liked & owned EIDO, IAF, IAE, SGF, KEF, ENY, And now buying lately BRXX, CNDA, adding to CNDA, adding to NORW, DEM & GULF for dividends. GGT & FGD for global telecom etc. I have lots of these what have you got? No question it is a good thing to get money or the current intrinsic value left in a US Pe$o out of the country beforethe enforcement of any more macro prudential economic measures, strategies and regulations are are adopted by the US Gov’t.
It is not yet illegal for US citizens to rent a safe deposit box at a bank in Canada, …yet. It is just that there are so few Canadian banks that even want that business and mostly try to discourage doing it. The UBS thing just the first warning shot. How about that beaten down JOF?!!! Now there’s an interesting idea, 14% discounts to NAV whoa.. But then the Yen is about to get clobbered by the global hedge funds with a massive carry trade developing out of this Greek debt fiasco blowing up and the demand destruction in commodities being reversed by the Lunatics like Obama opening the strategic reserves and creating demand when demand destruction was just starting to work. Maybe some early morning I’ll log back in and listen to the long winded pitch, just for some background noise.