Exchange Traded Funds (ETFs) today are not coming close to realizing their full potential. With the introduction of Dynamic Investment Theory and the new investment type they create called Dynamic Investments (DIs) this issue is resolved. DIs take full advantage of the fact that ETFs are easy to trade - a feature that MPT portfolios ignore. And DIs multiply the value of an ETF product line virtually overnight by creating new, powerful products by simply combining existing ETFs. This is value that is now lying dormant in a product line.

On this Web page I explain how the introduction of Dynamic Investments revitalized the ETF industry and makes ETFs mainstream investments.


The ETF - MPT Problem

From over a decade of teaching personal investing at the college level, I, Leland Hevner, know better than most that the world of investing today does not work for the average individual with money to invest. One reason for this is that the field of investing has not "evolved" in any significant manner for decades. We still use Modern Portfolio Theory (MPT), an approach introduced in 1952, to design static, buy and hold, portfolios. While markets have experienced radical change since then, MPT has barely changed at all and it no longer works in modern markets as evidenced by the loss of investor wealth during the market crash of 2008.

A vital component of the future of investing

A vital component of the future of investing

One development, however, gives me hope for a brighter future of investing. That is the introduction to the market of Exchange Traded Funds (ETFs) in the early 1990's. Yet the benefits of ETFs are stifled by the continued use of MPT portfolio design methods. Buy-and-hold portfolios do not exploit the buy-and-sell advantages of ETFs.

At my company, the National Association of Online Investors (NAOI), we are confident that the path to a better future of investing will include ETFs, not as standalone investments but as components in a "dynamic" investment structure as explained here. 

On this page you will read how the introduction of DIT and DIs will radically change the face of the ETF industry and, by extension, evolve the entire world of investing to work significantly better in modern markets.

I start this discussion with a quick review of Dynamic Investments. While DIs are discussed in-depth on the page at this link, I provide a summary of this new investment type here for edification of people who I point directly to this page via a personal message. Then I discuss how DIs will redefine and revitalize the ETF market and catapult it to new heights of consumer acceptance and sales.

A Dynamic Investment Review

Dynamic Investments (DIs) are a new investment type designed by the National Association of Online Investing (NAOI) and released in 2017 after 8+ years of research, development and testing. They were created to replace, or at a minimum supplement, portfolios designed using Modern Portfolio Theory (MPT). I show the DI structure in the figure at right with explanations of each element provided below.

  • The Dynamic ETF Pool or DEP: This component of the DI holds from 2 to 10 ETFs that are candidates for purchase by the DI which only owns one of these ETFs at a time. The DEP defines the assets / areas of the market where the DI would search for positive returns.
     
  • The Review Period: This component specifies how often the DI samples market trends and ranks the ETFs in the DEP to identify the one trending up most strongly. This is the one ETF that the DI will buy and hold until the next review period.  
     
  • The Trade Signal: This is a simple price chart indicator that measures the direction and strength of the price trend for each ETF in the DEP. Only the one ETF that is trending up most strongly at time of review is purchased, or held if already owned, until the next review.
     
  • A Fourth Component: There is another very simple DI component that lowers its risk substantially. It is revealed in The Dynamic Investment Bible and will be discussed with any organization with whom we work.

The rest of this page is dedicated to discussing how Dynamic Investments will radically change, and evolve, the ETF marketplace and the world of investing as a whole.

The Value of ETF Combinations - An Example

Dynamic Investments provide the structure needed to release the value of ETF combinations. As discussed above, ETFs are combined in the DEP of a DI where only the one trending up most strongly at time of review is bought, or held of already owned, until the next review. Dynamic Investment Theory gave us the foundation of logic to predict that the DI structure will produce superior returns in any economic condition with minimal risk. To test this theory during our development phase we used the simplest design possible, one that has only a total stock market ETF and a total bond market ETF in its DEP and rotates between them based on observations of each ETF's price trend. We called it the "NAOI Basic DI." If we could show that this DI produced the types of returns that DIT predicted, we would be confident that a virtually unlimited number of other DIs with more ETFs in the DEP would do so as well.

The "NAOI Basic DI" Performance Comparison Table

The table below shows the test results of the NAOI Basic DI for the ten year period from 2007-2016, a full decade of data, as compared to the performance of each standalone ETF in the DI's DEP and the performance of a buy-and-hold, MPT portfolio with the allocations shown. It is important to note that the MPT portfolio and the NAOI Dynamic Investment use the same ETFs. Only the structure and management of the investment type are different. Note that the Sharpe Ratio presented in the Table shows the amount of return achieved for each unit of risk taken, the higher the better. Any Sharpe Ratio greater than 1.0 is seen as a superior investment.

 
 

These results are astounding. No MPT-based portfolio, no matter how sophisticated, can come close to matching the performance of this simple Dynamic Investment. With the data from this table we had validated the theory that given the right investment structure the value of ETF combinations could be unleashed. This is value that is currently not being exploited in the ETF marketplace.

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. This is a game-changing development in the world of investing. MPT says that higher returns come only with higher risk. DIT shows that this assertion is wrong. By removing this false constraint from portfolio design, the entire world of investing is free to evolve forward, into the 21st century.

Dynamic Investments Are Consumer Products

Dynamic Investments: off-the-self products

Dynamic Investments: off-the-self 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. This is the Holy Grail of the financial industry. Dynamic Investments are comprehensive consumer products! And when investing becomes productized, everything changes. 

What makes a Dynamic Investment a "product?" There are two main factors as follows:

  • A Universal Goal. To be a "product" a portfolio must have a goal that works for everyone. DIs have just such a 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" 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; this is left up to error prone human judgments - and trades will depend on who is doing the analysis. With DIs no human analysis is needed - the "market" determines when trades are to be made. This is the second factor that makes DIs "products."

DIs are the market's first and only active investment with passive management. Taking the best elements of both management strategies enables this next-generation investment type to provide performance that is impossible with MPT portfolios. The "productization of investing" is evolution at its finest and sets the stage for a new, dynamic ETF marketplace that is discussed next.


The New ETF Marketplace

With the introduction of Dynamic Investments the ETF market finally has the "fuel" needed to reach its full potential. Using DIs, ETF developers will be able to significantly expand their product line virtually overnight, sell to more markets and increase revenues exponentially without the need to create a single new ETFs.

Presented below is a diagram that shows the entities and product flows in this re-energized marketplace. The black lines and letters show what exists now, the red lines and letters show what will exist in the ETF/DI marketplace of the near future. The benefits of this new ETF environment are discussed below the diagram.

The ETF Marketplace of the Future Using Dynamic Investments

 
 

 

A Boon for ETF Developers

Successful ETF developers of the future will include Dynamic Investments in their strategic plans. Organizations that prepare now for this change will reap the benefits and profit handsomely. Below are just a few of the benefits of so.

1. Increased ETF Sales by Meeting Public Demand. Three years of DI field-testing with NAOI students showed us that when the public learns about the simplicity, high returns and low risk of DIs they will demand them from the financial services industry. And since DIs work only with ETFs, the increased demand for DIs will translate directly into increased revenues. Click here to see how the NAOI makes the public aware of DIT and DIs in order to create demand for this new product type.

The sales of etfs are about to explode!

The sales of etfs are about to explode!

2. Unleash the Hidden Value in an ETF Product Line. The introduction of Dynamic Investments will significantly increase the value of a developer's existing ETF product line virtually overnight. DIT methods release the value of ETF combinations as illustrated above on this page. By combining existing ETFs to create Dynamic Investments an entire new line of powerful portfolio products can be developed without the time and expense of creating a single new ETF. And DIs can be sold to markets that standalone ETFs cannot reach. This topic is discussed in point 5, below, and clearly shown on the above diagram.

3. Open a New World of Powerful Product 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 the virgin field of DI product development. There are an unlimited number of unique and powerful DIs that can be created and 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 development "wall" is shattered and the door opens to a vast area of new opportunities.

4. Save Dying ETFs. Many very valuable ETFs are dying today because of low volume. Many are just too volatile to work in today's MPT, buy-and-hold, portfolio structure. But they work just fine in a Dynamic Investment's buy-and-sell environment. Using DIT methods, a portfolio developer would simply put these ETFs in the DEP of a Dynamic Investment where they are bought only if they are trending up more strongly than any other ETF in the DEP. And the DI will automatically sell them if their price starts to drop. Thus, the DI structure and management process "tame" the volatility of these ETFs and in essence bring them back to life and saving developers millions of dollars in sunk development costs.

5. Open New Markets and Revenue Streams. As mentioned above, by offering DIs, new markets open to the ETF developer. Because DIs are portfolio "products" that manage themselves, they will be the product of choice for Portfolio / Asset Managers, Financial Advisors, 401k Providers and even Individual Investors as discussed in more detail below on this page. These are markets that will provide significant revenue streams that standalone ETFs do not.

Benefits Summary. The bottom line is that the ETF developer that offers both single ETFs and ETF combinations in the form of Dynamic Investments will have a huge competitive advantage over those that sell only "naked" ETFs. To do so efficiently an ETF organization simply needs to work with the NAOI via a simple consulting contract to learn how and to get started before the competition.

Next I will discuss the other "players' shown in the above diagram and see how they will be affected by the introduction of Dynamic Investments into the ETF marketplace.

Dynamic Investment Developers - A New Player in the ETF Marketplace

new tools for building better porfolios

new tools for building better porfolios

The creation of Dynamic Investments is far easier than the creation of ETFs. As you know by now, DIs are simply combinations of existing ETFs. Any organization that is trained by the NAOI to create them can offer a full product line of this new and powerful investment type. Of course ETF Developers will be the primary entity to create and offer DIs, but other organizations can easily develop DIs as well. And they will have the advantage of being able to design DIs using ETFs from multiple developers.

Standalone Dynamic Investment Developers will be a new force in the investing field and startup opportunities will abound. The National Association of Online Investors is now one such company. We have designed multiple, how-powered Dynamic Investments and DI portfolios that we market via a DI Product Catalog. The NAOI Basic DI, discussed above on this page, is just one of them. Contact us via email to request a sample of our DI Catalog.

New, Powerful Strategies of Portfolio Creators, Strategists and Managers

Portfolio Strategists, Creators and Managers will welcome Dynamic Investments with open arms. In the current environment they must work with standalone ETFs and then deal with market analysis and market predictions to decide which to place in a portfolio and the allocation assigned to each. In the DI-based future of investing they will simply select Dynamic Investments to meet the goals of their clients, assign allocations and then relax in the knowledge that each DI will automatically adjust its holdings to maximize performance in changing market conditions. For these professions, the expense and guesswork involved with market analysis, market predictions and trade decisions goes away. In the new DI-based portfolios, "the market" is signalling all buy and sell actions and experience has shown that the market is far smarter at predicting future market movements than any one or group of analysts.

At this link you can see just a few of the many DI configurations that portfolio creators and managers have to choose from.

a new role for financial ADVISoRS

a new role for financial ADVISoRS

New Options for Financial Advisers

Financial advisors will benefit tremendously from the availability of DI products. In this brave new world, advisors will be able to select from a "catalog" of Dynamic Investments produced by ETF Developers and from independent DI Developers to quickly and efficiently create far more powerful portfolios than are possible today using MPT methods. And these portfolios will be far easier to create than starting from scratch with standalone ETFs and mutual funds and them making decisions based on expensive and often wrong market analysis. The ease of creating DI-based portfolios will free up time for advisors to meet the public's pressing need for more financial planning services. For more information on this topic click here!

More Choices for Individual Investors

And finally, the bottom of the diagram shows that DIs can be marketed and sold directly to the public by ETF Developers without going through a financial advisor. Since each DI is a comprehensive portfolio product, individual investors will be able to simply buy them from developer catalogs and implement / manage them using an online broker. Of course their needs to be an education component involved in this scenario. The NAOI provides the education needed via a full line of on-line courses, in-class courses and publications for investors of all experience levels. Optionally, the NAOI can train vendors to provide DIT education as a value added service. For more information on this topic click here!

Summary: DIs are a Boon for ETF Developers

Successful ETF developers of the future will include Dynamic Investments in their strategic plans. Organizations that prepare now for this change will reap the benefits and profit handsomely. Below are just a few of the benefits of so.

1. Increased ETF Sales by Meeting Public Demand. Three years of DI field-testing with NAOI students showed us that when the public learns about the simplicity, high returns and low risk of DIs they will demand them from the financial services industry. And since DIs work only with ETFs, the increased demand for DIs will translate directly into increased revenues. Click here to see how the NAOI makes the public aware of DIT and DIs in order to create demand for this new product type.

2. Unleash the Hidden Value in an ETF Product Line. The introduction of Dynamic Investments will significantly increase the value of a developer's existing ETF product line virtually overnight. DIT methods release the value of ETF combinations as illustrated above on this page. By combining existing ETFs to create Dynamic Investments an entire new line of powerful portfolio products can be developed without the time and expense of creating a single new ETF. And DIs can be sold to markets that standalone ETFs cannot reach. This topic is discussed in point 5, below, and clearly shown on the above diagram.

3. Open a New World of Powerful Product 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 the virgin field of DI product development. There are an unlimited number of unique and powerful DIs that can be created and 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 development "wall" is shattered and the door opens to a vast area of new opportunities.

4. Tame ETF Volatility and Save Dying ETFs. Many very valuable ETFs are dying today because of low volume. Many are just too volatile to work in today's MPT, buy-and-hold, portfolio structure. But they work just fine in a Dynamic Investment's buy-and-sell environment. Using DIT methods, a portfolio developer would simply put these ETFs in the DEP of a Dynamic Investment where they are bought only if they are trending up more strongly than any other ETF in the DEP. And the DI will automatically sell them if their price starts to drop. Thus, the DI structure and management process "tame" the volatility of these ETFs and in essence bring them back to life and saving developers millions of dollars in sunk development costs.

5. Open New Markets and Revenue Streams. As mentioned above, by offering DIs, new markets open to the ETF developer. Because DIs are portfolio "products" that manage themselves, they will be the product of choice for Portfolio / Asset Managers, Financial Advisors, 401k Providers and even Individual Investors as discussed in more detail below on this page. These are markets that will provide significant revenue streams that standalone ETFs do not.

Summary. The bottom line is that the ETF developer that offers both single ETFs and ETF combinations in the form of Dynamic Investments will have a huge competitive advantage over those that sell only "raw" ETFs. To do so efficiently an ETF organization simply needs to work with the NAOI via a simple consulting contract to learn how this can be done and to get started before the competition.

The NAOI Role In The Future of Investing

The NAOI: your Dynamic Investment support team

The NAOI: your Dynamic Investment support team

The National Association of Online Investors (NAOI) didn't just develop Dynamic Investment Theory / Dynamic Investments and stop. We also developed an extensive support system for their acceptance, implementation, management and use in all areas of the investing world. Among these support services are the following:

  • Public Awareness Seminars, Speaking Engagements and other Programs
  • Public Education Curricula for Academia
  • DI Designer Training Courses
  • DI Sales and Marketing Programs
  • Company Specific Consulting Services
  • ... and more

For more information on these services go to these pages: NAOI Consulting and NAOI Support Services

A Dynamic Investment Product Line and Catalog. The NAOI has created a full product line and catalog of Dynamic Investments that have been extensively tested and proven to be profitable in all economic conditions. Contact us for a sample of this catalog.

Research and Development. And finally, the NAOI will continue DIT research and DI development. The release of DIT and DIs is not the end of the evolution of investing, it is just the beginning.

The New Face of the ETF Market: Summary

The world of investing today is "stuck" in 1952 when Modern Portfolio Theory was introduced to the market and it is still the "settled science" approach to portfolio design today - its not open to question. While markets have changed significantly since 1952, MPT has not and this approach no longer works today. As a result, investors today can neither take full advantage of market returns potential nor protect their wealth from market volatility. I have presented on this Web page how the investing world can, and will, evolve to work in modern markets through the use of NAOI Dynamic Investment Theory and the ETF-based Dynamic Investments that this new investing approach creates.

Benefiting most from this evolution will be developers of Exchange Traded Funds and organizations that use ETFs. I have shown on this Web page just a glimpse of how, by using ETFs in a new portfolio / investment type structure, the world of investing is catapulted from 1952 to 2017 and beyond. And everyone benefits.

But perhaps most importantly, on this page I have restarted the evolution of investing that has been stuck in 1952 (when MPT was introduced) for far too long. DIT and DIs are one path forward. There are others. We must continue to work to find them.

Next Steps: 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 the change described here will thrive in the future of investing. Those that don't will fade away. That's just how evolution works.