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ETF Trends For 2016: Part 2, Robo-Advisors

In part 1 of this series we reviewed the growth of the ETF market in 2015 and introduced the series by covering currency hedged products. In part 2, we are going to take a brief look at a well-covered topic that could have a huge impact on the way ETFs are utilized: Robo-Advisors Robo-Advisors & The Rise Of The Machine In the last few years investors have not only embraced ETFs but the ways by which they manage their ETF investments. Robo-Advisors are, according to Investopedia: Online wealth management services that provide automated, algorithm-based portfolio management advice without the use of human financial planners. While older, wealthy investors have traditionally been wary of putting their money in non-human hands and valued human guidance, younger clients are more and more frequently selecting robo-advisors. According to a recent Spectrum study : 17% of investors 35 and younger and 11% of those ages 36-44 currently use a robo-adviser, compared with 6% of those 45-54, 4% of those 55-64 and 4% of those 65 and older. Younger investors are, as a rule, more willing to shift where their money is invested and try new technologies. If one platform doesn’t work out, they won’t waste time to see if the company improves next year, and there are more than enough platforms to try something different. Firms like Betterment and Wealthfront have exploded on this relatively new scene, with over $3 billion and $2 billion in AUM, respectively. However, well established financial firms like Schwab (NYSE: SCHW ), BlackRock (NYSE: BLK ), Fidelity and Vanguard have all seen the benefits of creating their own robo-platforms as a new source for revenue. After attending the 20th Annual IMN Global Indexing and ETFs conference in Scottsdale this December, Josh Brown of Ritholtz Wealth Management summarized the audience’s feelings on robo-advisors: The crowd here is very curious about how to implement the technology; there isn’t any concern about the B2C robos as competitors. The prevailing feeling is that their AUM growth has already peaked while Vanguard and Schwab have stolen their thunder. While the conference audience, mostly made up of RIAs and financials advisors, might think this market has reached its peak, market research data tends to disagree. Below is the expected growth in AUM by robo-advisors from consulting firm A.T. Kearney, as reported by Bloomberg . Click to enlarge Clearly, this is a trend to watch in the coming years, but what will it mean to ETF investors and issuers? During an interview with FinancialPlanning.com, Dodd Kittsley, head of ETF strategy and national accounts at Deutsche Asset & Wealth Management of Deutsche Bank (NYSE: DB ), stated the following when asked how robo-advisors affect ETFs: It really opens an avenue to a different investor base. I think certainly that’s going to be a continued catalyst for growth in the industry. For these robo-advisors, certainly much of their objective is to deliver strategic allocation models for long-term investors; and ETFs, when you think about it, are the purest way to execute on an asset allocation strategy. If you just finished this piece and find yourself wondering if robo-advisors are for you, I would refer you to David Fabian ‘s advice from 2014, when robos were just starting to gain traction in the market: At the end of the day, each investor considering a robo-advisor over a traditional asset manager should compare the cost savings with any additional value-added services that may be offered. In addition, an asset manager may have a unique philosophy that aligns more closely with your own method of investing. This can lead to peace of mind when choosing a third party to be the steward of your hard-earned nest egg. Robo-advisors lower the barriers to entry that existed in financial markets, much like online trading platforms opened up markets for part-time trading. As with part-time trading, this is not a one-fits-all solution, but another tool for investors to consider. As someone who watches the development of the ETF market for a living, I see robo-advisors as another gateway for exposing a new generation of investors to ETFs, significantly strengthening ETFs’ position as the fund vehicle of choice in the market. Stay tuned for part 3 next week, which will focus on the ETF fee war and concluding thoughts for the ETF industry trends in 2016.

Market Beating Performance Helped This Market Neutral Fund Grow Assets

Low correlation to traditional asset classes has always been one of the appealing features of alternative investments, but with the S&P 500 Index posting double-digit successive gains of 15.9%, 32.2%, and 13.6% from 2012 through 2014, low correlation hurt more alternatives than it helped. Even in 2015, a year marked by out-sized volatility, the S&P managed to eke out a modest gain of 1.36%, while most alternative categories posted losses in the aggregate. But not the LMCG Global Market Neutral Fund (MUTF: GMNIX ). Its annual gains of 4.82% in 2015 smashed the S&P 500’s returns and beat Morningstar’s Market Neutral category average by 507 basis points, and those returns followed a solid 9.99% return in 2014. Top Performance in 2015 This solid performance no doubt helped the fund attract interest from investors, pushing its assets under management (“AUM”) above $100 million by early 2016. While the fund’s 2015 performance fell a bit short of Morningstar’s Fund Manager of the Year award winner in the alternatives category, the Vanguard Market Neutral Fund (MUTF: VMNIX ), it did beat out 87% of its competitors in the market neutral category. In fact, the LMCG fund spent much less time underperforming over the course of 2015 than did the Vanguard fund. Click to enlarge “The fund has gained early traction with sophisticated advisors, who are familiar with alternative mutual funds and feel comfortable using it for a variety of goals,” said LMCG CEO Kenneth Swan, in a recent statement celebrating the milestone. “Traditional ‘low-volatility’ options such as bond funds or allocating to cash may not deliver the overall return profile these advisors are seeking. We designed this fund to offer investors a different option: to potentially generate positive returns regardless of the market’s direction.” The fund’s stock-selection process uses quantitative methodology that’s been “time-tested over 15 years and stress-tested in extreme market selloffs.” The strategy seeks capital preservation and is designed to generate positive returns in any market environment. Macro bets are avoided, and the fund does not use leverage. Volatility Likely to Continue “Equity markets could continue to be volatile in 2016,” said Gordon A. Johnson, Lead Portfolio Manager of the fund. “Our fund is designed to generate alpha on the long and short side – both domestically and internationally – and strives to provide a smoother ride for the investor whether the volatility that we are seeing continues or subsides.” The LMCG Global Market Neutral Fund is available in institutional ( GMNIX ) and investor (MUTF: GMNRX ) share classes, with respective net-expense ratios of 1.60% and 1.85%, excluding certain expenses as outlined in the prospectus. The minimum investment for GMNIX is $100,000, while the minimum for GMNRX is $2,500. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

How Much Will China Affect Your Portfolio?

When Apple (NASDAQ: AAPL ) reported its fourth quarter earnings earlier this week, Tim Cook, the company’s CEO, noted signs of “economic softness” in the greater China region . Apple’s stock fell by more than 6% the next day. While China wasn’t solely responsible for this decline, it highlights how economic conditions on the other side of the world can affect US investors. How much will China’s financial travails affect your portfolio? You can have direct exposure to China by owning stock in Chinese companies (for example through mutual funds and exchange traded funds). As Apple shows, you can also have indirect exposure to China through companies based in other countries. The iPhone maker gets almost 25% of its revenue from greater China (meaning China, Hong Kong, and Taiwan). Apple is something of an outlier, however; overall only about 2% of large US companies’ revenue comes from China . The Chinese economy can also indirectly have an impact on companies around the world in other ways, such as by affecting commodity prices. So which countries are most closely tied to China? The graph above shows the correlations between the movements of Chinese stocks and many of the world’s other large stock markets during the past three years. Correlation is a statistical measure of how closely two things move together, where a correlation of 1 means they move in lockstep and -1 means they move exactly opposite each other. Other countries in the Asia Pacific region—South Korea, Taiwan, and Australia—have the highest correlations with China. Interestingly Japan, China’s neighbor across the East China Sea, has the lowest correlation of the countries examined. The US is in the middle of the pack. Perhaps the most striking aspect of these correlations, however, is that they’re all fairly closely bunched together. By contrast Chinese stocks have a correlation of only 0.35 with commodities, and a correlation of -0.14 with US investment grade bonds. That’s probably not because Chinese itself has a large effect on all the different countries’ stock markets, but rather that the same factors that affect Chinese stocks (such as the outlook for the global economy) affect stocks all around the globe. So while some particular companies (such as Apple) and some particular countries (such as South Korea) may add some additional “indirect” China exposure to your portfolio, it’s important not to lose sight of the bigger picture. No matter what happens in Chinese markets, your investment performance is likely to be driven more by your broader exposure to different asset classes than by particular companies or countries.