Unleashing the Potential of ETFs
Using Dynamic Investments
Perhaps no financial organization type will benefit more from the introduction of Dynamic Investments that ETF developers and vendors. After all, DIs are created by combining existing ETFs. When DIs become the primary investment vehicle, outselling mutual funds, the sales of ETFs will soar. I show just a glimpse of how and why on this page.
ETF Potential Is Not Being Fully Realized Today
Exchange Traded Funds (ETFs) are one of the most significant investing developments in past three decades. But ask an average person with money to invest what an ETF is and 9 out of 10 will not know; they have never heard of them. As a result the ETF industry is not even coming close to realizing its full potential. On this page I explain why and show how the use of Dynamic Investments (DIs) solves the problem. DIs are poised to make ETFs the investment of choice in the financial services world today.
If you are an ETF developer or vendor you must read the information on this page. If your competitors read and act on what is presented here and you don't, you will be at a serious disadvantage. The sooner you learn about DIs and start using them, the sooner you will start profiting from them.
The ETF - MPT Problem
Let's start this discussion by first understanding why ETFs today do not get the respect they deserve.
As a teacher of investing at the college level for over a decade I, Leland Hevner, know that the public has little awareness or knowledge of Exchange Traded Funds (ETFs). When I ask my classes what an ETF is, perhaps 2 of twenty people will raise their hand. And this is a shame as we, at the National Association of Online Investors (NAOI), believe that ETFs will play a key role in the evolution of investing. There are two primary reasons why ETFs are seen today as little more than "quirky" mutual funds. They are as follows:
1. The MPT Buy-and-Hold Problem - Today the universal standard for portfolio design is Modern Portfolio Theory (MPT). This methodology, first introduced in 1952, dictates that portfolios be designed to match an investor's risk profile via asset allocation mainly between stocks and bonds and then held for the long term. This buy-and-hold management strategy does not exploit the ease-of-trading benefit that makes ETFs uniquely powerful. Thus, portfolio advisors and creators rarely, if ever, recommend placing ETFs in the portfolios of their clients.
2. The Advisor Sales Commission Problem - Financial advisors want to make money. And sales of mutual funds will almost always provide a higher commission to the advisor than will sales of ETFs. And since most individual investors are not equipped to challenge the recommendations of their advisors, ETFs are rarely recommended to them. Thus, most investors hold mutual funds today - not less expensive ETFs.
As a result of these two elements and others ETFs are not the investment of choice by the financial industry today. Mutual funds have held that distinction for decades and continue to hold it today. This is about to change with the introduction of Dynamic Investment Theory (DIT) and Dynamic Investments (DIs) that are powered by ETFs.
DI Use Will Cause ETF Sales to EXPLODE!
NAOI Dynamic investments (DIs), as described in more detail at this link, use only ETFs as their investment vehicle. The structure of a generic DI is shown at right. You can see that each is designed to include a Dynamic ETF Pool (DEP) that contains multiple ETFs from which the DI selects one to hold at a time. This being the one ETF that is trending up most strongly in price at time of periodic review -e.g. quarterly.
DIs embrace a buy-and-sell strategy that is necessary to cope with today's volatile markets and to produce returns that buy-and-hold MPT portfolios cannot touch. By periodically changing the ETF they hold based on market trends, DIs take maximum advantage of the ETFs ease of trading. Thus, when DIs become the public's investment type of choice - which they will in the very near future - ETF sales will skyrocket and dwarf the sales of mutual funds.
Uncovering Hidden Value in ETF Product Lines
In addition to increased ETF sales, Dynamic Investments will enable an ETF developer / vendor to multiply the value of their existing ETF product line virtually overnight. DIs do this by monetizing the value of ETF combinations. This is value that is currently lying dormant in the product line. To understand this concept let's look at a quick example.
The table below compares the returns of four investment types for the past decade - from the start of 2008 to the end of 2017. Shown for each are the average annual return and the Sharpe Ratio - a measure of the amount of return achieved for each unit of risk taken, the higher the better and any number over 1.00 indicates a superior investment.
The first two data rows show the performance of two standalone ETFs that can be bought from a variety of vendors today. The first ETF tracks a Total Stock Market index and the second tracks a Total Bond market index. The third data row shows the performance of an MPT portfolio with a 50% allocation to the Stock ETF and 50% to the Bond ETF. The MPT portfolio holds both at all times and allocations are only changed via human intervention. MPT portfolios have no sensitivity to market movements. The final row shows the performance of the simplest possible NAOI Dynamic Investment that holds two ETFs, one for Stocks and one for Bonds, in its DEP and automatically rotates between them periodically based on which is trending up most strongly at the time of periodic reviews. It holds only one of these ETFs at a time.
Very clearly the NAOI Dynamic Investment was the superior investment during this test period. This is an example of the amazing power of, and value unleashed by, combing existing ETFs in the dynamic DI structure. This is value that is not realized by the static MPT portfolio structure. And this is value not realized by organizations with an ETF product line.
Our tests also showed that even higher returns are possible by adding more ETFs to the DI's Dynamic ETF Pool (DEP), giving it more areas of the market to search for positive returns. Higher returns without higher risk is a game-changing development in the world of investing. MPT is based on the premise that higher returns come only with higher risk. DIT shows that this is wrong. By removing the constraints of MPT portfolio design, the world of investing moves into the 21st Century and outcomes thought to be impossible suddenly become probable. And no financial entity will benefit more from this change than ETF developers and vendors.
Dynamic Investments Are Consumer Products !
As we worked to develop Dynamic Investment Theory and tested multiple Dynamic Investments, we soon realized another amazing thing was happening. With DIs, we were "productizing" the world of investing. Dynamic Investments are comprehensive consumer products! And when investing becomes productized, everything changes. This is the Holy Grail of the financial industry.
What makes a Dynamic Investment a standardized consumer "product?" There are two main factors as follows:
- A Universal Goal. To be a "product" an investment type must have a goal that works for everyone. DIs have this goal by seeking maximum returns with minimum risk in the market areas defined by the ETFs in their DEP. This is a goal that all investors want to achieve regardless of their risk tolerance. Thus, DIs do not need to be customized for each investor as is required for MPT portfolios. They can be bought "off-the-shelf" from a variety of vendors like any other standardized consumer product.
- A Comprehensive Investment Type. DIs not only specify the ETFs to work with but also how they are to be managed on an ongoing basis. Trades by the DI are signal periodically and automatically based on a sampling of market trends. In contrast, MPT portfolios provide no guidance on how they are to be managed on an ongoing basis; this is left up to error-prone human judgments. With DIs no human analysis is needed - the "market" determines when trades are to be made. The fact that DIs are active investments that are passively managed is the second factor that makes DIs consumer products.
Once the world of investing is "productized" all types of wonderful things happen. When multiple vendors sell the same investing product, the cleansing effects of competition enter the market. Prices go down, expenses go down, product quality increases, more choices arise, services improve and the vendors that provide the best investing solutions rise to the top in this new competitive environment. Organizations that don't match the better products and services of competitors will disappear. Very little competitive pressure exists in today's MPT-based markets where it is impossible to compare the performance of one customized portfolio with another. In contrast, the performance of DI products is easy to compare to other DIs and to that of MPT portfolios. As a result, inferior products and advisors become easy to spot and only the best survive. These are among the beneficial changes that will be brought to the world by the DI productization of investing.
The "Productization of Investing" is covered in detail in Chapter 10 of The Dynamic Investment Bible as discussed here.
A Vast New Arena of Investment Research and Development
Today, ETF developers are hitting the "wall" as indexes for virtually every market, market segment and asset type have at least one ETF that tracks each. To find unique ETFs developers are having to create increasingly narrow and exotic ETFs that the public will not buy. Dynamic Investments solve this problem by opening a vast new field of DI product research and development.
There are an unlimited number of unique and powerful DIs that can be created by combining existing ETFs in the DI structure. And there are an unlimited number of ways these DIs can be combined in DI portfolios as discussed on this page. In the new DIT-based world of investing the new product development "wall" is shattered and a door is opened to a vast area of new opportunities. The NAOI can train individuals and organizations to take full advantage of these new research opportunities by becoming Certified NAOI Dynamic Investment Designers via our DI Design training course and/or a consulting contract as discussed here.
Dynamic Investment Designers - A New Link in the Portfolio Design Process
The creation of Dynamic Investments is far easier than the creation of single ETFs. As you have learned on this page, DIs are created simply by combining existing ETFs in a the dynamic structure discussed above. Any organization that is trained by the NAOI to create DIs can easily offer a full product line of this new and powerful investment type that will be in far greater demand than single ETFs or ETF-based MPT portfolios.
Of course ETF Developers will be the primary candidates for becoming DI designers, but other organizations can easily develop DIs as well. And organizations not connected to an ETF developer will have the advantage of being able to select ETFs from multiple organizations to build their Dynamic Investment catalog of products.
Independent Dynamic Investment Developers will be a new force in the future of investing and startup opportunities will abound. The National Association of Online Investors is one such company. We have designed multiple, high-powered Dynamic Investments and DI portfolios that we market via our NAOI DI Product Catalog. These are DIs that can be implemented immediately with NAOI guidance as provided in The Dynamic Investment Bible. The NAOI Basic DI, discussed above on this page, is just one of our offerings.
This is a chance for startup companies to gain a foothold in the financial services industry that is dominated by billion dollar companies. Such opportunities are rare in the buttoned-down field of financial services. The first companies to take advantage of this one has limitless growth potential. This discussion can be continued at this link.
Contact us to learn how to become a Certified Dynamic Investment Designer rapidly and inexpensively.
A New, Better Portfolio Building Block
Portfolio Strategists, Creators, Managers and Financial Advisors should all welcome Dynamic Investments with open arms. In the current investing environment each must work with standalone ETFs or mutual funds and then deal with economic analysis and market prognosticators to decide which to place in a portfolio and with what allocations of money. This is an error-prone process fraught with bad data, inaccurate analysis and poor judgments. This complexity goes away when Dynamic Investments become the basic building blocks for portfolios.
In the DI-based future of investing portfolio designers will simply select Dynamic Investment "products" from a DI designer's catalog to meet the goals of their clients. They will first identify DIs having DEPs that contain ETFs for areas of the market where they want to search for positive returns. Next they will assign allocations of money to each based on an investor's goals. Once these simple steps are completed, the designer sits back and relaxes, confident in the knowledge that each DI they have placed in a portfolio is periodically and automatically adjusting its holdings to maximize gains and minimize losses as economic and market conditions change.
At this link you can see just a few of the many DI portfolio configurations and building blocks available to portfolio advisors, creators, strategists and managers.
The New ETF Marketplace
The introduction of DIs opens significant new markets for ETF developers and vendors. Because each is a comprehensive "product", DIs can be sold directly to the public via catalogs in conjunction with NAOI educational materials that show how to implement and manage them. ETF developers will also to sell to specialized Dynamic Investment Designers as discussed above who transform "raw" ETFs into polished Dynamic Investment products.
Presented below is a diagram that shows the entities and product flows in this dynamic and revitalized ETF marketplace. The black lines and letters in the diagram show what exists now, the red lines and letters show what will exist in the DI-enhanced marketplace of the near future.
The ETF Marketplace of the Future Using Dynamic Investments
You can easily see the benefits that accrue to ETF Developers in this market environment. They have new products to sell in the form of DIs and new markets in which to sell them. They also have a new buyer for ETFs in the form of Dynamic Investment Designers. This is a totally different, and far more profitable, marketplace than vendors of only standalone ETFs must deal with today. An NAOI consulting contract can show any of the involved organizations how to take full advantage of this new market dynamic - an the ROI will be astounding!
NAOI Support Resources Make It All Possible
The National Association of Online Investors (NAOI) didn't just develop Dynamic Investment Theory / Dynamic Investments then stop. We spent 3+ years field testing Dynamic Investments using NAOI students you used them in their "live" portfolios and provided us with valuable input. Almost all continue to use DIs today.
We also developed an extensive system of support to ensure the acceptance of this new investment approach and investment type. Among these support services are the following:
- Public education in the form of classes, books, seminars, speaking engagements, etc. The more that the public becomes aware of DIs, the greater the demand for them will be.
- Corporate Training Programs on the Use of Dynamic Investments
- DI Designer Training Courses
- DI Sales and Marketing Training Programs
- Company Specific Consulting Services
- Public Education Curricula for Academia
- ... and more
The Amazing Future of Investing Book
Of course the whole intriguing story of why and how Dynamic Investments were developed cannot be told on this Web page or this Web site. The full story is told in the recently released book entitled The Amazing Future of Investing shown at right
You can read more about the book and purchase it in the NAOI Store it by clicking here. Corporate quantity discounts are available - contact the NAOI for the corporate discount code.
To take full advantage of the benefits of Dynamic Investments today contact the NAOI today. We provide a full ranges of services from introductory information seminars to fully customized consulting contracts. Organizations that embrace Dynamic Investments here will thrive in the future of investing. Those that don't will fade away. That's just how evolution works.