You are absolutely spot on Jeffrey. I discovered this difference between TWR and CWR when I was reading Overlook Richard Lawrence’s book and how he tried to navigate this. Wrote about it here.
Hi! Thamk you for responding! I’d like to understand the article,
I may not understand the context. I had the understanding that trading more stocks is an active approach while trading less is a passive approach. I am not sure what you are comparing if that is not true.
The story is that you should select ETFs that trade less or even not at all, if I understand correctly. There could be more to it because some active ETFs beat the market.
DYNF ishares factor rotation has a turnover of 90% and is not leveraged FFLC is fidelity fundamental large cap and is not leveraged. My cursory guess is that it invests more in high beta during market up times and more in low beta during down times. It is doing more than that. They both have positive alpha over 3 years or possibly more.
They would not factor significantly into averages but they would be ahead of passive ETFs for a period of time including the last 3 years. Maybe we need something more soohisticated than averages, which does not tell the whole story. It indicates an empirical trend, but may not be conclusive because exceptions like DYNF and FFLC exist.
I’m looking at the monthly flows into and out of funds. These reflect decisions investors—not the portfolio manager—make to buy or sell the funds in question. The more volatile the flows, the more buying and selling they did. So it’s not primarily concerned with how well the manager did in buying and selling. Rather examines relationship between investor trading activity (ie vol of flows) and how much their average dollar earned.
Please make the plot and legend bigger for readability and interpretability. There is a concept called volatility drag. I surmise that on average aggressive traders could create their own volatility. causing increased volatility drag, dragging down the pre-tax amounts. This is averages again. I think that some funds like FFLC and DYNF trade fairly frequently but they also systematically create asymmetric capture. When the stock market goes up, the these etfs go uo more, When the stock market goes down, these ETFs go down less. This happens over years of up and down in different market conditions leading to an improved result. It is these funds that successfully perform asymmetric capture that will perform better than passive funds. Stock pickers on average will not overcome passive funds because the efficient market hypothesis is a strong theory in practice.
Those ETFs are too small as percentage of assets to have affected the results. (Not even sure they’re in here; I think we don’t classify leveraged ETFs as ‘equity’.) Active vs passive not really relevant in this analysis unless investors trade actives more often than passives and it impacts their dollar weighted returns more.
Jeff, I think this is because 401k and IRA investors, who are universally buy and hold, own a lot of index funds that don’t have flow volatility. It would be interesting to see this analysis based on fund outlflows alone, so that buy-and-hold investors who make regular contributions don’t skew your data.
You are absolutely spot on Jeffrey. I discovered this difference between TWR and CWR when I was reading Overlook Richard Lawrence’s book and how he tried to navigate this. Wrote about it here.
https://visioninvesting.substack.com/p/learning-from-richard-lawrence-of
Hi! Thamk you for responding! I’d like to understand the article,
I may not understand the context. I had the understanding that trading more stocks is an active approach while trading less is a passive approach. I am not sure what you are comparing if that is not true.
The story is that you should select ETFs that trade less or even not at all, if I understand correctly. There could be more to it because some active ETFs beat the market.
DYNF ishares factor rotation has a turnover of 90% and is not leveraged FFLC is fidelity fundamental large cap and is not leveraged. My cursory guess is that it invests more in high beta during market up times and more in low beta during down times. It is doing more than that. They both have positive alpha over 3 years or possibly more.
They would not factor significantly into averages but they would be ahead of passive ETFs for a period of time including the last 3 years. Maybe we need something more soohisticated than averages, which does not tell the whole story. It indicates an empirical trend, but may not be conclusive because exceptions like DYNF and FFLC exist.
Thanks for considering this.
I’m looking at the monthly flows into and out of funds. These reflect decisions investors—not the portfolio manager—make to buy or sell the funds in question. The more volatile the flows, the more buying and selling they did. So it’s not primarily concerned with how well the manager did in buying and selling. Rather examines relationship between investor trading activity (ie vol of flows) and how much their average dollar earned.
Please make the plot and legend bigger for readability and interpretability. There is a concept called volatility drag. I surmise that on average aggressive traders could create their own volatility. causing increased volatility drag, dragging down the pre-tax amounts. This is averages again. I think that some funds like FFLC and DYNF trade fairly frequently but they also systematically create asymmetric capture. When the stock market goes up, the these etfs go uo more, When the stock market goes down, these ETFs go down less. This happens over years of up and down in different market conditions leading to an improved result. It is these funds that successfully perform asymmetric capture that will perform better than passive funds. Stock pickers on average will not overcome passive funds because the efficient market hypothesis is a strong theory in practice.
Those ETFs are too small as percentage of assets to have affected the results. (Not even sure they’re in here; I think we don’t classify leveraged ETFs as ‘equity’.) Active vs passive not really relevant in this analysis unless investors trade actives more often than passives and it impacts their dollar weighted returns more.
Jeff, I think this is because 401k and IRA investors, who are universally buy and hold, own a lot of index funds that don’t have flow volatility. It would be interesting to see this analysis based on fund outlflows alone, so that buy-and-hold investors who make regular contributions don’t skew your data.