Hello and welcome to the Web site of the National Organization of Online Investors (NAOI).

Allow me to introduce myself as Leland Hevner, President and CEO of the NAOI, an organization I founded in 1997 with the mission of empowering individuals to invest with confidence via comprehensive, objective education and the use of online resources. Since our founding, thousands of individuals have taken our courses …..

This is an “invitation only” Web page that I have made accessible to a select few of my LinkedIn contacts who develop or sell Exchange Traded Funds (ETFs) and who I believe will benefit most from the information provided here. It is not accessible from the site’s navigation menu.

Article Overview: Exploiting the Full Value of ETF Product Lines

This article provides an overview of how a new investment type created by the NAOI, called Dynamic Investments (DIs), enables financial organizations to maximize the value of their ETF product lines. They do so by fully exploiting the unique benefits of ETFs; something that is not done by today’s MPT-based portfolios.

On this page you will learn how DIs enable organizations that own or work with ETFs to uncover massive value that is currently lying dormant in existing ETF product lines. And it discusses how this can be done easily, quickly and with minimal cost.

The Unique Benefits of ETFs

As a leading provider of personal investor education to the public, the NAOI views ETFs as one of the most significant developments in the world of investing since index mutual funds were introduced in the 1970’s. ETFs provide all of the diversity benefits of mutual funds with the added benefits of being easy to trade, charging lower fees and enabling people to easily invest in virtually any asset type and market/market-segment that exist today. We believe that many investing goals can be better met by using of ETFs instead of mutual funds.

Why Are ETFs Not Used More Often?

Despite the significant benefits of ETFs, we find that they are being massively under-used in investor portfolios today. A large number of individuals who attend NAOI investor education classes tell us that they have never heard of ETFs. We see three main reasons for this as follows.       

1. Advisor Compensation. Financial advisors are typically more highly compensated for selling Mutual Funds than ETFs. As a result they are rarely recommended in client portfolios.

2. The Use of Buy-and-Hold Portfolios. Virtually all portfolios recommended by advisors today are designed using a portfolio design approach called Modern Portfolio Theory. MPT uses a buy-and-hold portfolio management strategy. As a result they do not take advantage of the easy-to-trade benefit of ETFs.

3. A Lack of Investor Education and Awareness. The typical individual investor today is not aware of the benefits of ETFs; in fact, many don’t even know that ETFs exist so they do not ask their advisors to use them.

As a result of these factors and others, organizations that own ETF product lines today are not coming close to realizing their full revenue generation potential. This problem is solved with the development of a new investment type created by the NAOI called Dynamic Investments (DIs) that do take full advantage of the unique benefits of ETFs. By doing so, DIs make ETF product lines far more valuable than they are today. I show how below, starting with a quick review of how DIs work.

A Short Introduction to NAOI Dynamic Investments

Following the significant losses of MPT-based portfolios during the market crash of 2008-2009, I stopped all NAOI education classes until we could find and teach an alternative approach to portfolio design and management. This event showed to me that MPT methods, introduced to the market in the 1950’s, simply could not cope with modern markets.

Following a multi-year R&D project, we met this goal with the development of Dynamic Investment Theory (DIT). DIT sets the logic and the rules for the creation of an innovative investment called Dynamic Investments (DIs) that are capable of automatically changing the ETFs they hold based on a periodic sampling of market price trends. Presented below is a quick explanation of the DI structure and management process. A more detailed discussion of both DIT and DIs is found starting at this link.

This diagram shows the design elements of all Dynamic Investments. An explanation of each component is presented below the diagram.

In the Dynamic ETF Pool (DEP), a DI designer places multiple ETF purchase candidates. On a periodic basis, as defined by the Review Period (e.g. Quarterly), the ETFs in the DEP are ranked using the Price Trend Indicator to identify the one that is moving up in price most strongly. This is the ETF that is purchased (or retained if already owned) and held until the next Review. The value of the ETF held is protected by a Trailing Stop Loss Order.

These components make DIs “market-sensitive” and capable of consistently producing returns that are significantly higher than “static” MPT portfolios for the same time period. And they do so with lower risk and absolute protection from market crashes.  Following is an example of simple DI performance.

The Performance of the Simplest Dynamic Investment, 2008-2019

The simplest DI possible holds only two ETFs in its DEP, one that tracks a Total Stock market index and one that tracks a Total Bond market index. The price trends of each are reviewed Quarterly and the one ETF having the strongest price uptrend is purchased, or retained if already owned, and held until the next Review event.

The table below shows the average annual returns of this Simple DI for the period from 2008 to 2019. Also presented for comparison purposes is the performance of an MPT portfolio that holds both ETFs at all times with the allocations shown in the table. The Sharpe Ratio shows the amount of return produced for each unit of risk taken and the higher the better.

You can see that by using a built-in, objective and automated trading plan along with a buy-and-sell management strategy, Dynamic Investments take full advantage of the “ease-of-trading” benefit of ETFs. The MPT portfolio’s buy-and-hold management strategy does not.

The Performance of an “Enhanced” Dynamic Investment

The introduction of Dynamic Investment Theory and Dynamic Investments opens a massive and virgin field of new product development in which an unlimited number of high-performance DIs can be created for virtually any investing goal by simply combining existing ETFs in the DI format. One of the many areas of DI research that can produce significant value is identifying an optimal set of ETFs to place in the DEP. For example, adding only one carefully selected ETF to the DEP of the DI discussed above produced the following performance for the same time period.

This “Enhanced” DI’s performance skyrocketed because it was given an additional area of the market to search for stronger price uptrends at a Review event. And this higher return came without commensurate additional risk as shown by the higher Sharpe Ratio. Of course not all combinations of ETFs will provide superior performance. The NAOI offers training courses in the art and science of optimal DI design along with the development tools required.

How Dynamic Investments Increase ETF Product-Line Value

Now that you know how Dynamic Investments work, let’s look at several ways in which they increase the value of ETF product lines held by financial organizations today.

Increased Sales of ETFs Used By DIs

The NAOI is teaching the use of Dynamic Investments to the investing public via our extensive education channels. As students learn about the simplicity, high returns and low risk of DIs, the demand for them will grow. And as demand for DIs grows, so too does the demand for the ETFs that they use. Financial organizations that offer DIs will sell far more ETFs than they do today.

Creating New DI Product Lines and Monetizing ETF Combinations

Financial organizations can easily create a full product line of high-performance Dynamic Investments that meet a wide spectrum of investing goals by simply combining existing ETFs in the DI product structure discussed above. The DI investment type enables the “monetization” of ETF combinations and by doing so uncovers massive value currently lying dormant in an ETF Product Line. This is a huge development in the investing world!

New DIs can be created with far less time, effort and expense than is required to create new ETFs or mutual funds. And extensive testing by the NAOI shows that each well-designed DI will provide higher performance than virtually any standalone ETF, mutual fund or MPT-based portfolio created to meet the same investing goal. Plus, this higher performance comes with absolute protection from market crashes – a benefit that will sell DIs, and the ETFs they use, by the millions.

The NAOI has identified four basic Dynamic Investment types for a new product line, each meeting specific investing goals that cannot be met using today’s industry standard investments and portfolios. DI investment type and hot they are used are revealed to financial organizations with whom we work as discussed at the bottom of this page.

Opening New Sales Markets

ETF developers today sell their products mainly to financial advisors who place them in portfolios for retail and institutional clients. A DI product line opens an additional market for ETF developers and vendors. This unique investment type can be sold directly to individual and institutional investors as explained below.

Sales of ETFs directly to the investing public market are made possible by the fact that Dynamic Investments are the market’s first comprehensive investment type; one that not only specifies the ETFs to work with but also how they are to be managed on an ongoing basis.

You read above on this page that DIs have a built-in, intelligent trading plan that automatically signals trades based on a periodic review of the price trends of the ETFs in their Dynamic ETF Pool (DEP). Thus investors can easily implement and manage on their own using an online broker if they wish. Instructions for doing so are found in the simple “DI User’s Manual” created by the NAOI. And since no subjective judgments are involved, DI management can easily be automated by either the online broker or the DI vendor.

By being “plug-and-play” portfolio products, DIs open a massive new market for ETF Developers / Vendors that does not currently exist. As a result, the value of an existing ETF product line increases dramatically.

Creating Competitive Advantage When Selling ETFs to Financial Advisors

While DIs can be sold directly to the public as discussed above, feedback from NAOI students shows us that most individuals prefer to take advantage of DIs by working with a financial advisor. And they will seek advisors that offer DIs.

To meet this demand, the NAOI works with financial advisors and portfolio strategists/designers to show them how to include DIs as building blocks in an MPT-based portfolio. We demonstrate how the addition of a dynamic component to virtually any “static” MPT portfolio can increase its returns and lower its risk. More information related to Dynamic Portfolios is found at this link on the NASDAQ site.

ETF developers and vendors that offer a full product line of Dynamic Investments to advisors and portfolio designers, in addition to standalone ETFs, will own a massive competitive advantage over those organizations that offer only standalone ETFs. And, again, the value of current ETF product lines increases.

Making ETFs “Mainstream” Investments

The following chart illustrates the points made in the above discussion. It shows a process in which NAOI trained DI Designers use existing ETFs to create a new product line of powerful Dynamic Investments. These DIs can be marketed to both Advisors and Portfolio Designers who include them as building blocks that significantly increase returns and lower the risk of MPT-based portfolios that they recommend to investors.

But also note that ETF Developers and Vendors can also sell DIs directly to the public; a massive market that is mostly unavailable to them today.

When the market learns about the high performance with lower risk of DIs, they will become “mainstream” investment products on a par with standalone ETFs and mutual funds. And organizations that offer them will have a massive competitive advantage over those that don’t.

The Art and Science of DI and Dynamic Portfolio Design

Dynamic Investment Theory opens a massive and virgin field for the development of a virtually unlimited number of powerful Dynamic Investments and Dynamic Portfolios. And as you have read above, each Dynamic Investment can be easily created by simply combining existing ETFs in the DI structure. But to create optimal DIs that produce the highest results, NAOI training is required as discussed at this link.

This is an extensive and exciting field of new product development as each DI component is a variable enabling the creation of Dynamic Investments that meet a full range of investing goals and that work in all economic conditions. This being said, the NAOI has found that setting all of these variables as constants except for the ETFs to be held in a DI’s DEP works quite nicely. However, more experienced designers, trained by the NAOI, can also change the other variables described below:

• The Review Period - As discussed above, the ETFs in the DEP are ranked periodically to identify the one that is moving up most strongly in price. The NAOI default Review Period is quarterly but in some cases monthly reviews can an work better. A designer can also easily change the review period depending on market conditions. And they can use both a quarterly review for a portion of a DI and a monthly review for the rest. Astounding results are possible by working with this design element.

• The Price Trend Indicator - The NAOI uses a default trend indicator that works extremely well and we share this information with the organizations we work with. However this is also a variable that can also be changed.

• The Trailing Stop Loss Order - The standard NAOI trade trigger for this Stop Loss Order is a 7% drop from the highest price the DI reaches during the the short period it is held between Reviews. However, for more volatile ETFs, we consider a 10% drop sell-trigger.

DI design is primarily a “science” as defined by Dynamic Investment Theory. It uses objective observations of market data to automatically signal trades that take advantage of current market conditions. This makes it both easy to use and “teachable” to our students. But DIT also allows for any of the DI components to be changed. As a result, DI design can also be seen as an “art”, allowing for innovative designers to create DIs to fit the specific needs of their clients.

The NAOI has been studying the creation of optimal DIs and Dynamic Portfolios for 5+ years. We have developed a testing platform that enables us to efficiently identify optimal sets of ETFs, and optimal settings for the other variables, to create products that meet a variety of investing goals. Based on our expertise, the NAOI has a catalog of optimized DIs and Dynamic Portfolios that we share with the organizations we work with via either a consulting agreement, an advisory agreement or a Partnership. These DI-based products have been proven to outperform virtually any current investment product or portfolio in all market conditions.

The opening of a new field of investment development represents a massive opportunity for any organization to be the first to design a totally new, unique and powerful product line of proprietary investments products.

NAOI Dynamic Investments – More Effective than Fintech Products

The NAOI is today watching as major financial organizations spend millions of dollars on Fintech partnerships with the goal of producing higher performing products, attracting more clients, opening new sales markets and increasing revenues. The NAOI sees much value in this effort. But, as explained in this brief article, the use of simple NAOI Dynamic Investments accomplishes all of these goals in a shorter time-frame, with less effort and at far lower cost. DIs, not Fintech products, are the ultimate key that enables financial organizations to attract new clients and meet their revenue goals. And by working with the NAOI, doing so is incredibly simple and cost effective as discussed just below.

There Will Be Skeptics

Of course such a powerful and fundamental change as introduction of Dynamic Investments as discussed here will have skeptics; performance like they provide simply can’t be possible! As a part of our development process we allowed investing professionals to review our work and we dealt with all manner of reasons why DIs and Dynamic Portfolios won’t work. In fact, one chapter of the book shown just below deals with these issues. The scan a list of the top objections to DIs and our responses, go to this link.

Working with the NAOI

The information on this page and on the NAOI Web site barely scratches the surface of the power of using NAOI Dynamic Investments and Dynamic Portfolios. To learn more about this evolutionary approach to investing and how it can give your organization a significant competitive advantage in a crowded field, the NAOI offers the following education and support resources:

1 - The “Introducing Dynamic Investment Theory” book pictured at right. It is available for purchase now in the NAOI Store at this link.

2 - Advanced DIT Education Seminars and DI Design Classes as discussed at this link.

3 - Consulting and Advisory Agreements that will show your organization how to take maximum advantage of this new approach to investing as discussed at this link.

4 - NAOI Partnerships are an ongoing relationship that enables our organizations to work together in multiple areas as discussed at this link.

5. The NAOI Email Updates List. Be the first to be alerted to new NAOI developments and product releases by joining our Email Updates List at the bottom of this page or any page on our site.

Or simply contact me personally at LHevner@naoi.org to discuss other forms of cooperation for working together to create a better, more profitable future of investing for both your organization and your clients.

Summary

The world of ETF development and sales is becoming more and more difficult and crowded. An ETF currently exists for virtually every index that in the market. Finding a competitive edge via new ETF development is becoming virtually impossible.

In the very near future this log-jam will disappear as new investment product development will concentrate on combining existing ETFs in the Dynamic Investments structure as discussed above. And virtually all DIs that are created by NAOI-trained DI Designers will produce higher returns with lower risk than virtually any standalone ETF or mutual fund in existence today.

Rarely does such a simple investment type such as Dynamic Investments enable financial organizations to create so much value with so little time, effort and expense required. Being the first to work with the NAOI to learn how this is done will instantly provide an organization to gain a massive competitive advantage in the increasingly crowded field of ETF product development. And we can show how to build “moats” that make this competitive advantage last.

Contact me personally at LHevner@naoi.org to discuss how we can work together to both provide investors with better products and your organization with more clients and higher revenues.

Learning More

For a more comprehensive Executive Overview of Dynamic Investment Theory and Dynamic Investments go to this link. This is another “invitation only” Web page.