Opinion & Analysis

Inside ETFs: How To Explain 'Smartbeta'

It's all about KISS?

by Helen Simon

Ms. Simon has been the CEO of Personal Business Management Services, LLC, an investment advisory firm in Ft. Lauderdale, FL since 1998 and has more than 25 years of experience in the financial services industry. She is a faculty member at the Wayne Huizenga School of Business at Nova Southeastern University. She occasionally shares her posts with us. Connect with her by e-mail: helensim@nova.edu

I had the pleasure of attending a truly impressive conference this past week at the lovely Diplomat Hotel in Hollywood. It was sponsored by an interesting organization called ETF.COM.

For those of you not familiar with the term ETF, or exchange traded fund, it refers to a relatively new mutual fund-like product that has many of the benefits of a mutual fund and few of the drawbacks. The name of the conference was Inside ETFs. The agenda was chock-full of interesting personalities and some fair to great educational sessions. Believe it or not, Karl Rove and James Carville participated in a spirited debate on the second day of the conference.

So, as you can see, this was no small potatoes! And speaking of potatoes… the food was actually excellent. I am always amazed at the organization that can feed 2,000 people at an event and make it look effortless. As with every industry event I’ve ever attended, there is always a new buzzword humming around the conference. For this one, it was the term “smart beta”.

To be honest, I still haven’t really figured out exactly what this term actually means. I’m not sure how many of the presenters could really explain it on a fifth grade level (my criteria for a good teacher…). I believe a few of the attendees had the courage to ask, but as the words came rolling out of the presenters’ mouths, I felt myself going into one of those trances that I remember entering during trigonometry class in high school.

they started throwing words around like Alpha and F-Squared… okay, I said, show me the money

I listened, but it sounded like another language and I couldn’t reiterate it for all the tea in China, nor do I have any better understanding of what the term actually means…. I just remember the twilight zone type music that played in my head as they talked.

Send in the clowns

What got me more than anything, though, was the circus-like nature of the wholesalers who set up shop in the exhibit hall to sell their wares. There had to have been 60 or 70 different ETF providers, each with a different gimmick. A decade ago, these puppeteers were all selling mutual funds. Many of those companies are gone and have been replaced by the new ETFers, same gimmicks, with giveaways that are a bit more tech savvy.

Being the curmudgeon that I am, I questioned them rather severely. Many of them appeared to take offense to me asking what was so great about their fund that would justify a charge of often three times what I can pay for a similar investment with a company like, my favorite, Vanguard. Defending their products, they started throwing words around like Alpha and F-Squared… okay, I said, show me the money. Does your product beat the index? Well, of course, they claimed. Can you show me some evidence?, I say. Well, nothing in writing, but – trust me – it does. Well, as the saying goes, I was born at night but not last night.

Keeping it simple

This particular exchange brings me back to one of my favorite old sayings… Sometimes the Emperor IS naked. As I left the circus floor, I happened across the Vanguard booth where I happened to start up a conversation with a lovely young man named Eric, who had a great fifth grade level answer for every question I asked. As I stood there, I felt as if the fog was lifting the twilight zone music that had been playing in my head.

I realized how easy what I was already doing was and how my time would be better spent honing on my financial planning skills in other areas, like figuring out ways to help my clients be tax savvy in their golden years and helping them keep more of their hard-earned dough in their own pockets as opposed to Uncle Sam’s coffers. So, KISS is still my motto!