Super ETFs and RoboInvestor (The Long and Short Of Investing)

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How would you like to make a lot of money even during a Recession?

And you do not have to sell your soul.

Before having the big reveal, let’s review a little history. 

History

1924                   1990       2006                2012 

MutualFunds -> ETFs -> InverseETFs->Long-shortETFs

First, mutual funds were created where your broker bought a batch of stocks at the end of a day for the long term.  These have usually been industry aka sector specific. 

Next, Electronic Traded Funds or ETFs came along that did the same as Mutual Funds with a long term bias by industry/sector but they have been allowed to be traded in real time. 

Then came Inverse ETFs which were ETFs but instead of long positions of stocks, these were only invested in shorted stocks for a particular sector or index.  Surprisingly, Inverse ETFs have not garnered a huge following though they perform well during a recession.

One unique recession strategy involves timing the move from regular ETFs to inverse ETFs.  But timing the market is well known to be very difficult and very risky.

What’s New?

Vanguard created possibly the first long-short ETF called the Vanguard Market Neutral Fund or VMNFX.  It tries to balance long investments in profitable growth stocks with short sales on failing stocks.

This is intriguing.  Most analysts already concentrate on an industry/sector and know the best companies as well as the worst ones.  These analysts already know which ones will beat and which ones will miss earnings estimates.  

Unfortunately, Vanguard makes several mistakes with VMNFX in terms of the long/short mix and the industry/sector mix.

First, VMNFX is neutral meaning it is 50% long and 50% short ALL THE TIME as seen in the following portfolio composition figure. 

Even though this last year has seen VMNFX beating many normal ETFs, it does NOT increase the percentage of long stocks when the market is going up NOR increase the short position when the market is going down. In other words, VMNFX never changes it long/short percentages.

Secondly, the VMNFX fund is charted to analyze A LOT of industries, as the previous composition figure shows, but with just a few analysts.  A group of normal ETFs covering many industries would have hundreds of analysts in comparison.  Consequently, the VMNFX fund has grown a mere 20% in 10 years as seen below in a hypothetical growth chart.

Is There A Better Way?

A better approach would be to have a group of sector specific ETFs that invest in a mix of long stocks and shorted stocks. These could be called Super ETFs because they are profitable in good times and could easily make money even in bad times like a recession.  How is that possible you ask?

Besides concentrating on a particular sector, Super ETFs would have several fund managers to determine the variable ratio of long purchases versus shorted positions.  For example, the ratio might be 75% long and 25% short during a normal market year.  

Fund Manager 1 might suggest 70% long and 30% short. Fund Manager 2 might suggest 80% long and 20% short.  The third Fund Manager might agree on the average of the other’s recommendations and end up with 75% long and 25% short.

But soon as a recession approaches, such as this year, a Super ETF might have a higher percentage of short positions. For example, 80% short and 20% long.

Fund Manager 1 might suggest 85% short and 15% long. Fund Manager 2 might suggest 75% short and 25% long.  The third Fund Manager might agree on the average of the other’s recommendations and end up with 80% short and 20% long.

Returning to Vanguard’s long-short VMNFX ETF, it is clear from the many industries in the portfolio above that the goal was to automate a complete investment portfolio mix for any investor.  But as already mentioned, this new long-short investment product took on too many sectors and, thus, failed to consistently beat other ETFs.  For example, the Fidelity Biotech ETF (FBIOX) grew 50% in ten years compared to VMNFX which grew only 20%.

Why Super ETFs?

A Super ETF has the higher probability of success because of its variable long-short mix yet dedication to a single sector as most normal ETFs do today.

Each Super ETF could also use the following standard recession predictors to change the percentage of long versus short positions.

1. Yield curve – Treasury 10 -year minus 2 year rates

2. Dow Jones Transport Index

3. GDP Now

4. VIX – Volatility Index

A better example than VMNFX is the 18-month old Leatherback Long/Short Alternative Yield ETF or LBAY.   As the following LBAY performance chart shows, it has grown from $24.50 per share to $29 YTD or 18% when most stocks are down this year.  Also, it has grown 45% since its inception in November 2020.  By the way, FBIOX is down 46% in that same 18 months.

But unfortunately, LBAY is hindered by the same philosophy as VMNFX of using a few analysts to cover a lot of industries/sectors.

How Should We Invest In Multiple Sectors?

Multiple Super ETFs can be used to achieve the intended VMNFX and LBAY goals of automation of a complete investment portfolio for any investor.

Several brokerages have created Robotic aka Software Tools such as Fidelity’ Go that invest in a mixture of funds, usually their own.  The goal of these is similar to VMNFX and LBAY: create a complete, automated, diversified portfolio. But Fidelity Go does not perform well in bad times because all of its ETFs are normal ETFs invested only in long-term products.

A RoboInvestor software tool could be designed to utilize just Super ETFs.  That way it leaves the long/short mix to the funds and can concentrate on creating a diverse portfolio.  

A RoboInvestor can take advantage of cyclical or seasonal sector trends.  It is common knowledge that cyclical stocks are volatile and tend to follow trends in the economy.  Also non-cyclical stocks tend to outperform the market during an economic slowdown.  For example, the RoboInvestor can invest in the retail sector before the end-of-the-year holiday rush and increased consumer sales.  The RoboInvestor can also rotate out of cyclical stocks and into defensive stocks depending on where in the business cycle the economy is headed. 

Here is a chart of historical performance of sectors across the business cycle that Fidelity provides and that a RoboInvestor tool can use.

Summary

In conclusion, you do not have to sell your soul to have an automated successful investment portfolio.  That is because investment success can come with a combination of Super ETFs and a RoboInvestor.  Together they can automate a complete investment portfolio for any investor. 

Super ETFs will have a proper mix of long and short stocks in a specific sector.  A RoboInvestor software tool will pick the correct mix of cyclical and non-cyclical sector Super ETFs.  The result is investors will see profitability automatically in both good times and during bad times such as recessions.

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Occupy This – Stop Robocalls

stoprobocalls

The other day I gave an impromptu speech at my Toastmasters club.  I started out by asking how many people knew about Citizen’s United.  One hand was raised.

Then I asked how many people knew about robocalls.  Nearly every hand was raised.

That summarizes how limited the marketing campaign is for reversing Citizen’s United and approving a 28th Constitutional Amendment to do so.  People just don’t have the time to understand the ramifications of the Supreme Court ruling in the Citizen’s United case.

We have a better chance of passing a 28th Amendment and make change if we concentrate on something most people hate.  Yes you got it – robocalls.

Henceforth, we need to call the 28th Constitutional Amendment the Political Robocall Amendment.

wethepeople

I learned the other day that England actually allows their political campaigns to last only one month.  What a concept.  But I am setting my sites on larger fish than a one month time limit.

I am targeting the Super PACs, and the out of control campaign spending by the rich .003 percent of the population, and the enormous amounts of political television ads and of course the ginormous numbers of robocalls by politicians. I have had enough and I am not going to take it any more.

There are plenty of people and cities that feel the same way.  There are hundreds of websites supporting a 28th Constitutional Amendment.  I agree with them because it is the only way to reverse Citizen’s United. But there are at least 20 proposed versions.   Most concentrate on the following two issues:

1. corporations are not people or citizens

2. money is not free speech.

We need to get down to one version.  The MoveToAmend.org version appears to have the most support.  It is rather simple as most approved amendments tend to be.  But I have several concerns.

One concern is the need to define citizens as individuals and restrict ONLY corporations.  Instead we need to restrict ALL groups of people, whether they are corporations, for-profits, non-profits, unions etc.  If we restrict one group, money will flow to others.

Another concern is saying money is not free speech.  This is like trying to train your dog to not poop on the carpet by trying to train it to not poop at all.  In other words, we will have more success if we limit campaign spending to individuals and a certain amount rather than trying to eliminate money as free speech.

Likewise, I hate to say it, but we will never get rid of all robocalls, but we can limit them.

political_robocall_amend

Here is my attempt at an amendment which indirectly eliminates Super PACs and greatly reduces robocalls.

1. Each citizen is a person as defined in the Constitution with human rights and these rights are not granted to artificial groups of people.

2. Campaign contributions shall be allowed only by citizens and the amount per citizen per election shall be determined by Congress.

Here is a book about this very subject.

http://www.kickstarter.com/projects/804567260/2033-the-20th-anniversary-a-book

Also please support MoveToAmend.org to greatly reduce robocalls.