ETF Exchange Traded Funds (ETFs) 2018

{Note from mods - this thread continued from here: Exchange Traded Funds (ETFs) 2017}

Well it's obviously possible for an active manager (fund) to outperform an index
Therefore also possible for a group of funds to outperform the index.
If they don't it due to poor selection, not any law of maths that makes it impossible.

Buffet seems to imply from his explanation in the video that the active managers actually have a buy and hold method effectively the same as the index with their fees as an extra cost - or at least that is effectively the aggregate position of all the active funds.

 

Each investor is unique. Some investors (especially retirees) are content if they underperform the index a bit but don’t experience significant capital drawdowns. The outcome is likely still to be better than being mostly invested in cash / bonds forever to avoid capital loss. Behaviour aspects play a major role in all this.

Very few investors have the stomach to withstand the volatility of Buffet’s 90% S&P 500 / 10% Short Term Bonds Recommendation.

I’m a great fan of indexing but do also believe there is a place for active management for certain investors.

An interesting article by Ben Carlson:

 

Yes, one fund can outperform.
Yes, multiple funds can outperform.
No, It is impossible for all to outperform.

That's not what I heard exactly, just they can only take from each others pockets.

 

It’s an easy bet to take, have a look at US Spiva.

Bundling a bunch of 2 and 20s vs S&P at 5bps or so...no brainer!

The more efficient the market the more difficult to outperform, add a hefty fee and that is another few bricks in the back pack most will never be able to carry....good thing we don’t have to report post tax returns at different tax rates eh, with the way we churn up the portfolio with our flavor of the month strategies. When it goes pear shaped just close the underperforming funds and start again. Those that have a stellar first decade (if we have enough goes we will make one stick merely on odds alone) then we need to hug index from there as we can point to long term outperformance (that slowly dissipates). Doesn’t matter, we filled our pockets along the way. Now pass the Grange.

 

What do you mean by that the Lifestrategy fund has been hampered by its structure?

 

It's doing it consistently and over the long term that has proven hard, then there's fees

 

Pre AMIT

 

100%.

Then there is the real world stuff - it is easy to see historical results, but please email me the list of hedge funds or similar who are going to be part of the 17% which will outperform (after fees) over the next 1, 2, 5 and 10 year periods. Will those which will be part of this 17% next year, still be in the outperform group over the 10 year period?

What if i pick a fund or funds which are part of the 83 odd % which under-perform? What if heaven-forbid I pick a fund which severely under performs? How many decades would it take me to catch up from such a disaster? Would I be able to do it in my lifetime?

From reading a heck load of buffett (probably too much) - the best thing I take form him ( and Munger) is the real world stuff, and their disdain of most economists and university courses. They operate in the real world, and the real world doesn't operate on a spreadsheet or in theory.

Sure, it is mathematically possible to win the lotto. So what.

 

Get stuck into them @Cityman. Money grabbing vultures the lot of them.

But the way, welcome.

 

I like Howard Marks' view (or maybe he just looked at the history of) on this, basically to aim for the top 20% you need to adapt a very high risk strategy and will strike out more often than not.

Potentially those at the top are most likely to sink to the bottom.

 

"even though most ETFs are supported by one or more market makers, there is no guarantee of active trading under illiquid conditions"

"Analysts point to the so-called flash crash in May 2010 as an example of the risks ETFs are susceptible to, when market makers were overwhelmed by a surge in computer-driven selling. Market makers stopped offering bid-ask quotes, fuelling volatility further and the eventual meltdown in equity prices"

What I find interesting about all this is then the author suggests the unlisted fund (as a seemingly safer option to the ETF) that the ETF is a subclass of.

"If you want an indexed fund, you can always use the Vanguard Retail Managed Fund (minimum $5000) but its returns are significantly lower than the ETF."

ETFs are more complex than they seem

 

Trying to get my head around SMSF accounting for ETF’s

I do our accounts for the SMSF on a cash basis. If cash from a dividend/distribution is received in July 2016 it would go into the 2016/17 financial accounts / tax return.

Vanguard however have supplied the annual taxation statement on an accrual basis. Ie the dividend paid in July 2016 (ex 1st, paid 18th) accrued in the period ended June 30, 2016 so is included in the 2015/2016 annual statement.

Do all other ETF managers also provide tax statements on an accrual basis?

Possibly asking a long shot question – but if anybody else does their own SMSF accounts on a cash basis – how do you handle the mismatch between cash based accounting and ETF taxation statements provided for on an accrual basis.


In the same vein:

I suspect most people would do their personal tax on a cash basis. How do you handle the ETF tax statements being prepared on an accrual basis? My suspicion would be most people / tax agents just include the amounts from the statement (prepared in Vangaurd case at least, on an accrual basis) and do the rest of the return for other dividends, interest, wages, rent etc on the standard cash basis and the tax office never bats an eyelid at the mixing of methods although I believe you are meant to choose one method only.


Unfortunately, a pragmatic mixing of methods is not viable for the SMSF because of the need to prepare financial statements that reconcile to the tax return.


I’m a diehard DIY – but this has me stumped so I’m hoping if others can share how they handle annual ETF tax statements for their circumstances, I might get a light bulb moment of how to apply to my circumstance. Don’t want to have to change to accrual basis just to accommodate ETF Annual Taxation Statements.

 

I know what you mean. I was bit stumped as well when I first started investing in ETF. I don't have an answer to your question since I use an accountant and pass on all details to him.

Why don't you give ATO help line a call and ask them to answer how should you handle this particular scenario?

Cheers,
Oracle.

 

I tried the ATO help line once and need professional help aftwards - and I don't mean financial professional help.

A cardinal sin as a diehard DIY- but I may have to consult an accountant, though I suspect they are just going to advise to convert the whole fund to Accural. Nothing like accounting complexity arising from investment decisions to simplify!!!!

 

Look forward to hearing what you uncover. Be nice to hear what the ATO says on SMSF and Individual holdings and any differences. I just handed it to my accountant.

 

Have a look at the info probably provided with the annual statement. The one I receive from STW states at the bottom:

"This notice contains information required for the preparation of your [tax year] income tax return and should be read in conjunction with the [Year] Tax Guide attached"

The breakdown included a distribution receive in the following year. I believe with most of these it is it is included in the tax year it accrues not the year in which it is received.

It's an effort an a half to find but the prospectus, available on the providers web site, would also likely include information regarding taxation matters.

However, in order to thoroughly confuse the issue, some but not all, declare them as dividends. I think IOO was or is one which does.

 

Its a pretty bad piece really and irrelevant to non traders. Of course in unusual circumstances "there is no guarantee of liquidity" as market makers may be "overhwhelmed". This is always the case with LICs and other stocks where there is no market maker. If a market maker steps out there is still on exchange buying/selling. The managed fund will adjust price after close of market each day to NTA based on closing prices, so that the price is always at NTA. The author makes no reference to nature of the distributions between ETF and Index managed funds quoted, which for mine is far more important for most investors than theoretical intra-day liquidity concerns.

 

Only had a quick glance but sounds like nonsense in Vanguards case given that their ETFs are just another Class of Units investing in the underlying wholesale “unlisted” Funds. So in theory the ETFs should at least have at a minimum the liquidity of the wholesale funds.

 

My thoughts too, which is why the author seemingly pointing the retail fund as a safer play pricked my ears up.

(there was also the chance I was missing something and needed a slap)

 

Regardless of whether ETF’s are susceptible to liquidity issues or not. Of what concern is short term technical issues like lack of liquidity to long term holders? I say bring it on!!! I’ll supply a little liquidity of last resort – for a price


If you’re a seller, either for emotional reasons or financially forced, into a liquidity squeeze – something has gone far more wrong with your investment strategy then the selection of an ETF as your asset.