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Return of the Nerd

Posted by Michael Venuto on Feb 24, 2021 8:30:00 AM
Michael Venuto
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The ETF Think Tank first introduced the ETF Nerd in December of 2017. The Nerd is meant to inspire engagement with the rigorous research we seek to support at the ETF Think Tank. It is also a symbol to highlight the key attributes of the ETF structure, which can provide better outcomes for investors: Transparency, Liquidity, Tax-Efficiency, and Lower Cost. When the ETF Nerd was first introduced, we used this symbol to focus on the transparency factor and evaluate a formulaic approach to quantify the diversification of an ETF portfolio. With the landscape of strategies changing rapidly and embracing more active, thematic, and niche strategies, we would like to introduce our latest Nerdy contribution: The ETF Management Matrix.

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Inherency is a Nerdy Word

The ETF Ecosystem is changing rapidly; the launches in 2020 looked very different than the overall ETF landscape. Historically, diverse low-cost passive beta funds dominated the launches and the asset flows. The growth of ETFs has been synonymous with the death of active investing, but now the ETF structure is supporting the resurgence of active management. With over 2300 US listed ETFs and multiple changes in the types of ETF strategies coming to market, the ETF Think Tank has devised a new systematic way to categorize equity ETFs. In order to solve the problem of grouping ETFs to research them, The ETF Think Tank, in partnership with ETFRC.com, has devised the ETF Management Matrix:

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Nerds Take the Red Pill

All research requires data, and that data must be categorized using a common nomenclature. With ETFs utilized to deliver so many different strategies, it is difficult to bucket approaches and outcomes in a systematic manner. The ETF Management Matrix embraces the transparency of the ETF structure to group all US-listed equity ETFs by comparing the investment approach to the diversification of the underlying holdings. Once these more homogenized groups are derived, then data can be used to set benchmarks for fees, assets, and many other milestones. To keep the process objective, the X axis of investment approach is defined by:

  • Traditional Passive Beta – any passive ETF that tracks an index that is based solely on geography, sector, liquidity, or market cap.

  • Non-Traditional Passive – any ETF that tracks a passive index and doesn’t qualify as traditional passive. This includes factor-based and so-called “Smart Beta” ETFs.

  • Active – defined by the prospectus.

The Y axis is defined by our ETF Think Tank Diversification formula and ranked by percentile:

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ETF Nerd Eco-Chamber

Before introducing our ETF Management Matrix, we reached out to fellow Nerds like Nate Geraci, David Nadig, Mike Akins, and Todd Rosenbluth. We always appreciate peer feedback and constructive criticism. Hopefully, this approach can set a process to start a dialogue for research and board reviews. With that said, we understand this is quite nerdy and subject to nomenclature debate, but we take pride in starting a conversation. Todd suggested that examples would help others understand the categories, so let’s wrap up with examples of the ten largest ETFs in each of our nine ETF Management Matrix categories.

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Disclosure
The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

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