Unleashing the Potential of Exchange Traded Funds
Exchange Traded Funds (ETFs) have been in existence for over 20 years but they have not flourished as a mainstream investment. The NAOI Investing Research Center (NIRC) sees this investment type as playing a key role in the future of investing. Yet according to NAOI surveys most individual investors have never heard of them. And those that have, see them as little more than a "quirky" mutual fund. A major problem is that the benefits of ETFs are not aligned with how the public is advised to invest. In today's buy-and-hold culture, the easily traded ETF is a second-class investment and unfortunately deemed not suitable for average investors.
The NIRC is preparing to change the image of ETFs by using them as the primary investment in the implementation of NAOI Dynamic Investments. If you are an ETF developer you will greatly benefit from joining us in this effort via an ETF-Developer Partnership as discussed on this page.
Why ETFs are Second Class Investments Today
There are many benefits of using Exchange Traded Funds but the big three are as follows:
- Easy to Trade
- Low Expenses
- Wide Range of Asset Type and Market Segment Coverage
These are incredibly important benefits that are stifled by traditional methods of investing. As mentioned many times on this site, investment portfolio design is almost universally guided by the rules of Modern Portfolio Theory (MPT). This approach dictates that a portfolio be constructed using asset allocation methods to match a user's risk profile. Then, once designed, the MPT portfolio is meant to be bought and held for the long-term, negating a major benefit of ETFs.
ETFs are not a part of the traditional methods used by a large majority of advisors today when designing portfolios for the public for three main reasons. First, their buy-and-hold strategy means that the ETF "ease of trade" benefit is ignored. Second, the fact that ETFs have low management expenses provides no incentive for advisors to market or sell them. Third, advisors typically stick with total market investments such as total stock market funds, total bond market funds, etc. when designing portfolios. They do not take advantage of the fact that ETFs enable the public to invest in a far wider range of market segments than traditional mutual funds. And it is in these more focused areas of the market that often the greatest returns potential exists.
The New NAOI Dynamic ETF and Time Diversification
The National Investing Research Center is changing traditional investing methods at their very core with the development of Dynamic Investing Theory that you can read about on this site. When this happens, the doors fly wide open for acceptance of ETFs as a First Class Investment.
Dynamic Investment Theory creates Dynamic Investments. This unique type of investment changes the investment it holds based on periodic (i.e. quarterly) sampling of market trends. This makes the Dynamic Investments responsive to market changes and enables them to capture positive returns potential anywhere in the market.
All of these tremendous benefits are realized most efficiently by the use of ETFs!
The areas of the market that a Dynamic Investment searches when looking for positive returns are determined by what we call a Dynamic ETF Pool or DEP. The DEP holds the ETF "candidates" that the Dynamic Investment ranks at a review period to determine which is moving up most strongly. This is the one the investment then buys and holds until the next review period. The fact that Dynamic Investments only holds an ETF for a limited period of time before re-ranking the DEP, means that move focused and thus more volatile ETFs can be owned with far less risk than when used in a buy and hold portfolio. Dynamic Investments are "time-diversified" and thus perfect vehicles for unleashing the full potential of a full range of ETFs.
You can see that Dynamic Investing Theory (DIT) and Dynamic Investments makes maximum use of all three unique benefits of ETFs as mentioned above. This unique investment type adjusts its holding periodically based on market trends. Thus it takes advantage of the ETFs ease of trading. Trading decisions are made automatically based on empirical observations without the need of human judgement, thus there is no need for high management fees. And finally by being included in a DEP virtually any ETF, regardless of its volatility, can have its chance to shine without the risk that would be incurred in a buy-and-hold environment. Remember it will not be bought unless it is surging upward more strongly than the other ETF in the Dynamic Investment's DEP.
Do we really need another Small Cap value ETF? Do we really need a Secured Corporate Loan ETF? Do we really need a leveraged buyout ETF? The public would answer these questions with a resounding NO! So why are many ETF developers engaged in creating "me-too" ETFs and ETFs that the public would never buy?
The answer is because traditional investing methods today provide no incentive for developers to create innovative ETFs. It is only when we throw out these outdated methods and work with updated investing methods such as Dynamic Investing Theory that the opportunities for ETF research and development explode!
The Design Variables and Opportunities for Innovation
Designing an optimal Dynamic Investment is both an art and a science. Among the design variables for each are the review period interval, the market strength indicators used and the ETFs placed in its DEP. These variables present a tremendous opportunity for any ETF developer to design and develop an entire product line of new and better Dynamic ETFs. Such new products that will enable the developer dominate this the market for this new and superior investment type. Following are areas of opportunity for Dynamic ETF developers.
Creating Intellectual Property
Dynamic ETF Pools (DEPs) designs will become the "indexes" of the future. A DEP is the engine that powers the performance of any Dynamic Investment. There are an infinite number ways to group ETFs together in a DEP, but most groupings don't work very well. Only through extensive testing can an optimal DEP be designed to meet a Dynamic Investment's goal. When such a DEP is found, it will be a very valuable asset for the developer - the same as market indexes are today. By finding and copyrighting Dynamic ETF Pools a company can add valuable assets to their balance sheet that can be licensed to other developers. The first Dynamic ETF developer to market will be in a position to dominate this field for years.
Filling the "Holes" with New ETFs
ETFs are developed today based on the premise that they will be a component of a "buy and hold" portfolio. This leaves a lot of volatile assets and market segments on the sidelines as they are just too risky for the average investor. When using Dynamic Investing Theory, ETFs can be developed with the specific purpose of being included in a DEP. Such ETFs need not be concerned with a buy and hold strategy. Dynamic Investments will only purchase an ETF in its DEP that is moving up strongly in current market conditions and then they will only be held for a short time until the next review when they may or may not be sold in favor of another ETF in the DEP. Thus, ETFs that glow hot for a while and then cool off just as rapidly are excellent candidates for a DEP but horrible candidates for an MPT portfolio. Valuable ETFs can be designed to fill in the "holes" in a DEP that has no good response to a unique economic condition. Here is a new area of ETF research and development that has not been touched!
Uncovering ETF Product Line Gold
If you have an ETF product line chances are very good that you are not maximizing its value. Sure, each ETF has value as a stand-alone investment. But there is also synergistic value created by grouping ETFs into a Dynamic ETF pool. Combining your ETFs in such a manner so that in virtually any market condition at least one is trending up produces an extremely valuable Dynamic ETF pool that can power a superior Dynamic Investment. This synergistic value is currently lying dormant in your product line. It needs to be awoken. There is gold in your ETF product line that you didn't know was there - Dynamic Investments help you to mine it
Benefits of an NAOI ETF-Developer Partnership
The NAOI Investing Research Center wrote the script for NAOI Dynamic Investing Theory. We defined a set of rules for creating a new class of investments called NAOI Dynamic Investments. This is a unique investment type that responds automatically to market changes and is capable of capturing the positive returns potential that exists in the market in any economic condition.
There are an infinite number of Dynamic Investments that can be created, but far fewer that are designed in an optimal manner. While there is no set formula for creating an optimal DEP or an optimal Dynamic Investment, the NAOI has created a methodology for designing and testing Dynamic Investments that works, and works exceedingly well. As an NAOI ETF Development Partner we will show you how it is done. Refer to these pages for further discussion related to Dynamic Investment Development Training: NAOI Partnerships and Products.
Dominating a New Field of Investing Research and Development
Rarely in the life of an industry does the opportunity exist to be the first on the scene as a new field of research and development opens up. With Dynamic Investment Theory we stand today at the doorway of just such an opportunity. Working with the NAOI, your organization can be the first on the field and have the opportunity to dominate it - before another company does. Working with the NAOI gives your organization a massive head-start!
Contact us to get started today.