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Active vs. Passive Strategies Using ETFs

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.

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Active vs. Passive Strategies Using ETFs

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  1. 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

  2. Our Purpose • To review the pros and cons of using active vs. passive strategies using ETFs and their tax consequences. New Millennium Advisors

  3. 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? New Millennium Advisors

  4. 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) New Millennium Advisors

  5. Individuals Have Unique Characteristics • Risk preferences • Financial goals • Personal circumstances • Asset endowments • Time horizons New Millennium Advisors

  6. Can You Pick Your Time Horizon? Source: Standard & Poor’s New Millennium Advisors

  7. 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 New Millennium Advisors

  8. Instruments of Change • Economic cycles • Inflation • Government polices • Fed monetary policy • Regulatory environment • Environmental factors New Millennium Advisors

  9. Passively Active or Actively Passive? • Passive until change requires action (changes in strategic allocations) • Actively using passive funds (tactical changes in strategic allocations) New Millennium Advisors

  10. Are Passive Indexes Truly Passive? • Changing market definitions • Percent of market capitalization • Market cap or float-weighted • Market segmentation vs. diversification New Millennium Advisors

  11. Global Industry Classification Standard • Energy • Materials • Industrials • Consumer Discretionary • Consumer Staples • Health Care • Financials • Information Technology • Telecom Services • Utilities New Millennium Advisors

  12. 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) New Millennium Advisors

  13. 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 New Millennium Advisors

  14. Active Growth/Value Strategy Sources: New Millennium Advisors and Standard & Poor’s New Millennium Advisors

  15. Comparative Risk/Return Performance Source: New Millennium Advisors New Millennium Advisors

  16. Peak to Trough Drawdown Performance Source: New Millennium Advisors New Millennium Advisors

  17. Holding Period Frequency Source: New Millennium Advisors New Millennium Advisors

  18. 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 New Millennium Advisors

  19. 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 New Millennium Advisors

  20. 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 New Millennium Advisors

  21. 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. New Millennium Advisors

  22. 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 mcarty@qwafafew.org New Millennium Advisors

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