active vs. passive strategies using etfs
DESCRIPTION
Active vs. Passive Strategies Using ETFs. C. Michael Carty Principal & CIO New Millennium Advisors, LLC July 20, 2010 QWAFAFEW/NYC Presentation Patrick Conway’s New York, NY. Our Purpose. - PowerPoint PPT PresentationTRANSCRIPT
Active vs. Passive Strategies Using ETFs
C. Michael CartyPrincipal & CIONew Millennium Advisors, LLC
July 20, 2010
QWAFAFEW/NYC PresentationPatrick Conway’sNew York, NY
Our Purpose
To review the pros and cons of using active vs. passive strategies using ETFs and their tax consequences.
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Is Buy and Hold Dead?
Indexing works for investors as a group Individuals have unique characteristics Examples of characteristics changing Identify the instruments of change Passively active or actively passive? Are indexes purely passive?
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As a Group Investors Can Buy & Hold
Individual stocks, bonds and cash Actively managed portfolios (stocks, bonds &
cash) Mutual funds (stocks, bonds & cash) Passive funds (ETFs, ETNs, & ETCs)
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Individuals Have Unique Characteristics Risk preferences Financial goals Personal circumstances Asset endowments Time horizons
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Can You Pick Your Time Horizon?
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Source: Standard & Poor’s
Standard & Poor's 500 IndexFrom December 1976 to June 2010
0
200
400
600
800
1000
1200
1400
1600
1800
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Characteristics Change with Time Sell at the bottom & buy at the top Beat the market & absolute returns Marriage/divorce and disabilities Lotto, housing bubble/bust, & jobs Life, retirement & death
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Instruments of Change
Economic cycles Inflation Government polices Fed monetary policy Regulatory environment Environmental factors
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Passively Active or Actively Passive?
Passive until change requires action (changes in strategic allocations)
Actively using passive funds (tactical changes in strategic allocations)
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Are Passive Indexes Truly Passive? Changing market definitions Percent of market capitalization Market cap or float-weighted Market segmentation vs. diversification
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Global Industry Classification Standard Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Telecom Services Utilities
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Some Actively Passive ETP Pairs Possibilities
Large cap growth (IWF) vs. value (IWD) ETFs Large cap (IWB) vs. small cap (IWM) ETFs Domestic (IVV) vs. Foreign (EAF) ETFs Developed (EAF) vs. emerging markets (EEM) Two Chinas: FTSE (FXI) vs. Halter (PGJ) Gold (GLD) vs. Silver (SLV)
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Actively Managing Growth & Value
Strategy: Invest in the index that outperformed in the trailing two months
Indexes: Russell 1000 Growth & Value Range: January 1988 to June 2010
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Active Growth/Value Strategy
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Sources: New Millennium Advisors and Standard & Poor’s
Growth/Value Strategy vs. the Russell 1000 Growth and Value Indexes
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Feb-88 Feb-90 Feb-92 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10
Ind
ex V
alu
es (
1/31
/88=
1.00
)
Strategy R 1000 Gr R 1000 Va
Comparative Risk/Return Performance
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Strategy R 1000 Gr R 1000 Va
Reward/Risk 0.77 0.46 0.72
Return 11.78% 7.97% 9.14%
Std. Dev. 15.21% 17.17% 12.69%
Source: New Millennium Advisors
Peak to Trough Drawdown Performance
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Source: New Millennium Advisors
Duration Maximum
Date Peak Date Trough Months Drawdown
Strategy 10/31/07 17.059 2/27/09 7.335 16 -57.00%
R 1000 Gr 11/30/07 10.464 2/27/09 3.850 15 -63.21%
R 1000 Va 6/30/07 7.130 3/31/09 4.762 21 -33.21%
Holding Period Frequency
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Source: New Millennium Advisors
Monthly Holding Period Frequency
0
10
20
30
40
50
60
70
80
1 2 3 4 5 6 7 8
Number of Months
Ho
ldin
g P
erio
d F
req
uen
cy
How Should Tax Issues Be Managed?
Distinguish between qualified and non-qualified accounts
Consider the tax implications for long- and short-term investors, and equity and fixed income holdings
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Qualified and Non-Qualified Accounts
Non-qualified accounts can defer long-term capital gains indefinitely and withdraw funds at long-term capital gains rates
Retirement accounts defer taxes but are taxed at the ordinary income rate when funds are withdrawn
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Long-Term Investors Who Rarely Trade
Equity ETFs should be held in non-qualified accounts to get a favorable tax treatment
Fixed income investments should be held in tax-deferred accounts so income can compound tax free
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Summary and Conclusions Buy & hold strategies relates to the entire market and only
investors in the aggregate can hold it indefinitely. An individual’s buy & hold choices are limited by their risk
preferences, financial goals, personal circumstances, assets and their forms, and time horizons.
These characteristics change over time, so their strategic allocation must be actively managed.
As events cause changes, it is prudent and reasonable to adapt to them rather than be victimized by them.
Managing tax consequences is simplified using tax efficient ETPs in non-qualified accounts as surrogates for qualified accounts.
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Thank you!
C. Michael Carty
New Millennium Advisors, LLC
Two Rector Street, 15th Floor
New York, NY 10006
Tel. (917) 697-9464
Fax (212) 386-7590
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