Transcript 2010-07-20-ny-Carty

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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To review the pros and cons of using active vs.
passive strategies using ETFs and their tax
consequences.
New Millennium Advisors
Is Buy and Hold Dead?
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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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New Millennium Advisors
As a Group Investors Can Buy & Hold
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Individual stocks, bonds and cash
Actively managed portfolios (stocks, bonds &
cash)
Mutual funds (stocks, bonds & cash)
Passive funds (ETFs, ETNs, & ETCs)
New Millennium Advisors
Individuals Have Unique Characteristics
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Risk preferences
Financial goals
Personal circumstances
Asset endowments
Time horizons
New Millennium Advisors
Can You Pick Your Time Horizon?
Standard & Poor's 500 Index
From December 1976 to June 2010
1800
1600
1400
1200
1000
800
600
400
200
0
1976
1979
1982
Source: Standard & Poor’s
New Millennium Advisors
1985
1988
1991
1994
1997
2000
2003
2006
2009
Characteristics Change with Time
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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
Instruments of Change
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Economic cycles
Inflation
Government polices
Fed monetary policy
Regulatory environment
Environmental factors
New Millennium Advisors
Passively Active or Actively Passive?
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Passive until change requires action (changes in
strategic allocations)
Actively using passive funds (tactical changes in
strategic allocations)
New Millennium Advisors
Are Passive Indexes Truly Passive?
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Changing market definitions
Percent of market capitalization
Market cap or float-weighted
Market segmentation vs. diversification
New Millennium Advisors
Global Industry Classification Standard
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Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecom Services
Utilities
New Millennium Advisors
Some Actively Passive ETP Pairs Possibilities
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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
Actively Managing Growth & Value
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Strategy: Invest in the index that outperformed in the
trailing two months
Indexes: Russell 1000 Growth & Value
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Range: January 1988 to June 2010
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New Millennium Advisors
Active Growth/Value Strategy
Growth/Value Strategy vs. the Russell 1000 Growth and Value Indexes
Index Values (1/31/88=1.00)
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Feb-88
Feb-90
Feb-92
Feb-94
Feb-96
Strategy
Feb-98
Feb-00
R 1000 Gr
Sources: New Millennium Advisors and Standard & Poor’s
New Millennium Advisors
Feb-02
Feb-04
R 1000 Va
Feb-06
Feb-08
Feb-10
Comparative Risk/Return Performance
Strategy R 1000 Gr R 1000 Va
Reward/Risk
Return
0.77
0.46
0.72
11.78%
7.97%
9.14%
Std. Dev.
15.21%
17.17%
12.69%
Source: New Millennium Advisors
New Millennium Advisors
Peak to Trough Drawdown Performance
Date
Peak
Date
Trough
Duration
Maximum
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%
Source: New Millennium Advisors
New Millennium Advisors
Holding Period Frequency
Monthly Holding Period Frequency
80
Holding Period Frequency
70
60
50
40
30
20
10
0
1
2
3
4
5
Number of Months
Source: New Millennium Advisors
New Millennium Advisors
6
7
8
How Should Tax Issues Be Managed?
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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
Qualified and Non-Qualified Accounts
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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
Long-Term Investors Who Rarely Trade
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Equity ETFs should be held in non-qualified accounts
to get a favorable tax treatment
Fixed income investments should be held in taxdeferred accounts so income can compound tax free
New Millennium Advisors
Summary and Conclusions
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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
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
[email protected]
New Millennium Advisors