As the number of ETFs and ETF issuers grows at a breakneck pace and the focus of many products continues to narrow, it's a challenge to address methodology and liquidity when composing a portfolio. Simply comparing short-term performance among various ETF in any given sector often misses pitfalls such as liquidity and depth. Investors may find themselves paying up for a fast-moving ETF that looks good on paper but trades poorly in the open market.
According to Frank in a recent Fidelity Independent Adviser interview, such a hybrid assists investors in tackling both security-specific and systematic risks, both of which ETFOX addresses. "I am a student of Markowitz and the modern portfolio theory, which has helped me combat market risk by using ETFs," Frank said. "I am also taking security-specific risk out of the equation."
In the second half of 2008, Frank used iShares Barclays 20+ Year Treasury Bond Fund (TLT) and iShares Barclays 1-3 Year Treasury Bond (SHY) to achieve both short- and long-term exposure to the Treasury market.At the beginning of 2009, ETFOX owned the inverse Treasury fund UltraShort 20+ Year Treasury ProShares (TBT), a position that was increased in late January. Frank decreased his TBT position on February 10 but scooped up shares again in early March. Frank decreased his position again in mid-March but has been increasing his position in TBT since April 4. Frank said he did not sell the entire TBT position in mid-March because it was a macro bet, had high momentum and had consistently stayed near the top of his longer term rankings.