A major focus of NAOI Research and Development involves the use of Exchange Traded Funds (ETFs). We believe that this investment vehicle to be one of the most significant developments in the world of investing since mutual funds were introduced. Yet, in our opinion they are massively under-used today. Are research shows that this is because the universal use of Modern Portfolio Theory to design portfolios suppresses their advantages. MPT methods embrace a buy-and-hold portfolio management strategy. ETFs shine in a buy-and-sell environment. This is the environment the NAOI Dynamic Investment Theory establishes.

Dynamic Investment Theory (DIT) and Dynamic Investments (DIs) will change the way we invest in many areas. Below we discuss how the use of Exchange Traded Funds (ETFs) will be revolutionized when the world of investing changes from static to dynamic investing methods, NAOI Dynamic Investments finally enable ETFs to come alive and realize their full potential as mainstream investments and not as the "quirky" mutual fund alternative they are seen as by the public today.

What are ETFs?

Exchange Traded Funds (ETFs) are a unique investment type. But most average investors that the NAOI interacts with haven't even heard of them. So, let's review what they are. ETFs are essentially mutual funds that trade like stocks. Advantages of ETFs include the following:

  • Easy to trade - just like stocks
  • Prices change continuously during the day - just like stocks
  • Lower expenses than mutual funds
  • Provides diversification to a portfolio - just like mutual funds
  • A wide variety of markets, market segments and asset types are targeted by at least one ETF
  • Availability of ETFs that "short" markets - e.g. there exist several ETFs that go up in price when the stock market goes down
  • Trades within an ETF are not taxed until the ETF is sold - unlike a mutual fund in which internal trades are taxed when they are made, not when the fund is sold

As of this writing there are approximately 1700 ETFs traded in the market. You can learn all about them at sites such as ETFdb.com

Unleashing the Power of ETFs

ETFs are an extremely powerful investment type. They are investments that hold a groups of equities like mutual funds but have the benefit of trading like stocks, making them easy to buy and sell. But the full potential of ETFs is not being used today as they are typically bought as one component of a traditional MPT buy-and-hold portfolio. And because ETFs have low management fees, advisors are not likely to recommend them to clients. Mutual funds typically provide much higher commissions and fees. As a result, individuals view them today as little more than "quirky" mutual funds. This misconception ends with the introduction of Dynamic Investments.

In the future world of NAOI Dynamic Investments, ETFs will be free to shine. As you have read on this site, ETFs are the investment type of choice for use in building DIs. Each is designed with a Dynamic ETF Pool component that contains ETF candidates for purchase. At review time only the strongest uptrending ETF is bought and held until the next review. Because of their ease of trading and low costs, ETFs enable a DI to adjust its holding quickly, efficiently and inexpensively in response to market changes.

In the future world of dynamic investing the true power of ETFs is unleashed and investment returns that today's "experts" will say are impossible suddenly become probable.

Uncovering Hidden Value in ETF Product Lines

In addition to increased ETF sales, Dynamic Investments will enable an ETF developer / vendor to multiply the value of their existing ETF product line virtually overnight. DIs do this by monetizing the value of ETF combinations. This is value that is currently lying dormant in the product line. To understand this concept let's look at a quick example.

The table below compares the returns of four investment types for the past decade - from the start of 2008 to the end of 2017. Shown for each are the average annual return and the Sharpe Ratio - a measure of the amount of return achieved for each unit of risk taken, the higher the better and any number over 1.00 indicates a superior investment.

The first two data rows show the performance of two standalone ETFs that can be bought from a variety of vendors today. The first ETF tracks a Total Stock Market index and the second tracks a Total Bond market index. The third data row shows the performance of an MPT portfolio with a 50% allocation to the Stock ETF and 50% to the Bond ETF. The MPT portfolio holds both at all times and allocations are only changed via human intervention. MPT portfolios have no sensitivity to market movements. The final row shows the performance of the simplest possible NAOI Dynamic Investment that holds two ETFs, one for Stocks and one for Bonds, in its DEP and automatically rotates between them periodically based on which is trending up most strongly at the time of periodic reviews. It holds only one of these ETFs at a time.

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Very clearly the NAOI Dynamic Investment was the superior investment during this test period. This is an example of the amazing power of, and value unleashed by, combing existing ETFs in the dynamic DI structure. This is value that is not realized by the static MPT portfolio structure. And this is value not realized by organizations with an ETF product line.

Our tests also showed that even higher returns are possible by adding more ETFs to the DI's Dynamic ETF Pool (DEP), giving it more areas of the market to search for positive returns. Higher returns without higher risk is a game-changing development in the world of investing. MPT is based on the premise that higher returns come only with higher risk. DIT shows that this is wrong. By removing the constraints of MPT portfolio design, the world of investing moves into the 21st Century and outcomes thought to be impossible suddenly become probable. And no financial entity will benefit more from this change than ETF developers and vendors.

A Boon for Portfolio Managers and Strategists

Dynamic Investments / ETFs give portfolio managers and strategists an amazing new array of tools for meeting the goals of their clients and their companies. These are flexible investments that enable portfolio designers and managers to take advantage of any ETF's upside potential without worrying about its downside risk!

With Dynamic Investments portfolio managers can now put assets like commodities, gold, emerging markets, single countries stocks and even the volatile healthcare market into their portfolios without fear. Portfolio managers who take advantage of this approach will show significantly increased performance from their efforts. Those who don't will fare poorly in comparison.

Enabling ETFs to Dominate the 401(k) Industry

NAOI surveys of the general investing public show that 401(k) Plan participants are woefully under-educated about their plans. Many, if not most, do not know exactly what they own or why. They have simply bought MPT based portfolios recommended by an advisor and told to buy and hold. This results in 401(k) Plans that produce very mediocre returns, with high risk and high expenses. And after their plans crashed in 2008 participants have reason to worry about their plan's value when markets start to slide.

The introduction of Dynamic Investments (DIs) goes a long way to solving these problems and in the process enabling ETFs to dominate this huge industry. A 401(k) participant can simply buy a basic DI that periodically checks market conditions and automatically adjusts the ETF it holds to take advantage of the price trends it detects. ETFs enable this type of investing power far better than do mutual funds because of their trading ease, low trading costs and wide variety of markets they cover.

Also, NAOI Hybrid Portfolios are an excellent choice to be the standard "default" investment for the entire 401(k) industry. These are portfolios that have as their goal high returns with low risk and absolute crash protection. They meet the goals of everyone regardless of their age, time to retirement or risk profile. And since DIs automatically change their holding to take advantage of market conditions there is no pressure to manually review and re-balance them on a regular basis - an activity that is sorely missing in today's 401k environment. Even the simplest Dynamic Investment is a far superior default 401k investment than the disastrous "Target Date" fund/ETF that is used as a default investment today. Many Target Date ETFs and Funds have performed so poorly that they have been pulled from the market altogether.

The 401k market is a multi-billion dollar opportunity just waiting for companies to inject bold new ideas and products. The NAOI has given the financial industry the bold, new investment type needed to take advantage of this opportunity. The first organization that does so will become unreasonably prosperous.

A Boon for ETF Developers - Monetizing ETF Combinations

The field of Dynamic Investments represents a vast, virgin field of opportunity for investment developers. There are an unlimited number of DIs that can be created for an unlimited number of goals. And each new and better DI that is developed can become a very valuable asset on the balance sheet of the creating organization and the source of a significant new stream of revenue as they can be sold to the public or licensed to other companies much as ETFs or Market Indexes are today.

Plus, DIs do not need to be time consuming or expensive to create. Any organization that currently owns or sells a line of ETFs can create new DIs by simply combining ETFs they currently offer in the Dynamic ETF Pool of a Dynamic Investment as discussed above in the iShares example. All that's needed is training on how to do so. For this purpose the NAOI offers the "Dynamic Investment Design and Creation Class" that is described in the Products section of this site. 

ETFs Will Dominate the New Dynamic World of Investing

This section could go on and on. The revitalization of Exchange Traded Funds is just one area where change will be dramatic with the introduction of Dynamic Investing methods and the use of Dynamic Investments. 

When the world of investing changes from "static" to "dynamic" in the logical manner provided by NAOI Dynamic Investment Theory, performance that today's "experts" will say is impossible suddenly becomes probable. Such is the power of this much needed step forward in the evolution of investing.