The Evolution of Index and ETF Strategies: Going beyond Passive vs. Active

Transcription

1 0.75 CE Credits The Evolution of Index and ETF Strategies: Going beyond Passive vs. Active FOR ADVISOR USE ONLY

2 Agenda Evolution of indexing Market Capitalization Indexing Equal Weighted Indexing Fundamental Indexing Intelligent Indexing Innovative Structural Enhancements to ETFs Summary Q&A 2

3 Not All Indices Are Created Equal Index strategies have evolved over the past two decades Advisors need to go beyond the Index provider and understand the index strategy that best fits their clients needs To properly utilize index strategies, Advisors need to consider: Asset Class exposure Geographic exposure Sector exposure Diversification Valuation Tax treatment Weighting/Index Methodology 3

4 Indexing Timeline 4

5 ETF Timeline 5

6 Benefits of Indexing Rules Based/Disciplined Low Cost to Implement Transparent Diversified (Reduce Single Issuer Risk) Large Investment Capacity Easy to Replicate 6

7 Efficiency Comparisons Expense Capital Gains Turnover Ratio Risk Market Cap Index <3-15% % Lowest Fundamental/Intelligent Index 15-30% % Low Equal Weighted Index 25-40% % Medium Active Management % %+ High 7

8 Not All Indices Are Created Equal Market cap weighted Equal Weighted Fundamental Weighted Intelligent 8

9 Market Cap Indexing Example Selection Bias Weightings Style Bias Portfolio Turnover Diversification Market Cap S&P/TSX 60 Index Price Market Cap Growth & Momentum Low High Considered the benchmark Simple methodology Weight is a function of: Float x Number of Shares Considerations: Growth/Momentum bias Overweight's overvalued; Underweight's undervalued Tilts toward higher P/E companies 9

10 Market Cap Indexing Works Well When Does Not Work Well When Use For Large cap outperforms Growth outperforms Bubbles form Small cap outperforms Value outperforms Bubbles burst Tactical exposure Capture momentum and trends 10

11 Examples: Market Cap Indices Index ETF Ticker Consideration S&P/TSX 60 Index S&P 500 Index MSCI Broad Emerging Markets Index S&P/TSX Global Mining Index XIU XSP CWO CMW Geographic specific exposure to the 60 largest companies in Canada Geographic specific exposure to the 500 largest companies in United States Geographic specific exposure to the 20 countries considered to be emerging economies Sector specific exposure to the largest companies operating in the global mining sector 11

12 Market Cap Performance S&P 500 Index 15 Year Annualized Returns 6.80% 15 Year Standard Deviation 16.38% 15 Year Risk Adjusted Returns 0.42 Source: Bloomberg as of 3/31/11 12

13 Equal Weighted Indexing Example Selection Bias Weightings Style Bias Portfolio Turnover Diversification Equal Weight S&P/TSX 60 EW Index Market cap Equal Weight Small Cap High Varies Easy way to avoid mispricing of market cap weighting Easy to understand methodology Considerations: Equal weights all constituents Small cap bias relative to market cap benchmark Overweighting of less liquid securities has potential to lead to liquidity issues Tax inefficient, costly to implement 13

14 Equal Weighted Indexing Works Well When Does Not Work Well When Use For Small cap outperforms Bubbles burst Small cap underperforms Bubbles form Tactical exposure Overweight small cap exposure 14

15 Examples: Equal Weighted Indices Index ETF Ticker Consideration S&P/TSX 60 Equal Weight Index Dow Jones U.S. Large- Cap Banks Equal Weight Total Stock Market Index Equal Weight Banc & LifeCo HEW ZUB CEW Geographic specific exposure to the 60 largest companies in Canada, rebalanced quarterly Sector specific exposure to U.S. banks, rebalanced quarterly Sector specific exposure to the 6 largest tcanadian banks and d4l largest Canadian life insurance companies, rebalanced semi-annually 15

16 Equal Weight Performance S&P 500 Index S&P 500 EW Index 15 Year Annualized Returns 6.80% 9.55% 15 Year Standard Deviation 16.38% 18.23% 15 Year Risk Adjusted Returns Source: Bloomberg as of 3/31/11 16

17 Fundamental Indexing Fundamental Example FTSE RAFI Canada Index Selection Bias Fundamental Factors Weightings Fundamental Style Bias Value/Neutral Portfolio Turnover Low Diversificationifi High Delinks price and weight Goal of adding intelligence and potential for improved risk-adjusted returns to indexing Intuitive methodology Neutral exposure (growth & value) 17

18 Fundamental Indexing Award winning i methodology developed d by Research haffiliates LLC. Weights securities based on four factors of company size: 1. Total Free cash flow 2. Total Sales 3. Gross Dividends Paid 4. Book/Equity value Avoids structural u flaw of overweighting e g overvalued securities es and underweighting undervalued securities Methodology has generated excess returns* over capitalization- weighted constructs: 2 4% in developed markets 4 10% in less efficient markets Source: Research Affiliates LLC. *Historical excess returns should be looked at in the context of outperformance through a market cycle 18

19 Fundamental Indexing Works Well When Does Not Work Well When Use For Small cap outperforms Value outperforms Bubbles form Long term core exposure Low cost beta 19

20 Simulated RAFI US Large vs. Cap-Weight Three-Year Returns: % RAFI US La rge 3-Year An nualized Retu urn 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% For Cap Return < 0%, RAFI adds value in 93% of all cases For Cap Return 0-10%, RAFI adds value in 83% of all cases For Cap Return 10-20%, RAFI adds value in 80% of all cases For Cap Return > 20%, RAFI adds value in 46% of all cases -20% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Cap-Weight Year Annualized Return Note: The Cap-Weight 1000 is an annually rebalanced portfolio of the top 1,000 U.S. stocks by capitalization dating back to THE INDEX DATA PUBLISHED HEREIN IS SIMULATED, UNMANAGED AND CANNOT BE INVESTED IN DIRECTLY. PAST SIMULATED PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE AND IS NOT INDICATIVE OF ANY SPECIFIC INVESTMENT. ACTUAL INVESTMENT RESULTS MAY DIFFER. Source: Research Affiliates, based on data from CRSP and Compustat. 20

21 Examples: Fundamental Indices Index ETF Ticker Consideration FTSE RAFI Canada Broad exposure to Canadian market, CRQ Fundamental Index rebalanced annually FTSE RAFI U.S. Broad exposure to U.S. market, CLU, CLU.C Fundamental Index rebalanced annually FTSE RAFI International Broad exposure to developed (ex. U.S.) Fundamental Index CIE countries ex-u.s., rebalanced annually 21

22 Fundamental Indexing Performance S&P 500 Index S&P 500 EW Index FTSE US RAFI Index 15 Year Annualized Returns 6.80% 9.55% 9.96% 15 Year Standard Deviation 16.38% 18.23% 17.24% 15 Year Risk Adjusted Returns Source: Bloomberg as of 3/31/11 22

23 Intelligent Indexing Intelligent Goal of adding Example S&P/TSX Canadian Dividend Intelligence and potential Aristocrats Index for improved risk-adjusted d Selection Bias Factor Based returns to indexing Weightings g Asset class specific Style Bias Asset class specific Institutional type strategies Portfolio Turnover Asset class specific Intelligent Indexing Diversification Varies includes: Multi Factor Index strategies Dividend id d Index strategies t Commodity strategies 23

24 Examples: Intelligent Indices for Sectors Index ETF Ticker Consideration Index is rebalanced quarterly based on 12 factors including Earnings MFC Global Sector COW, CIF Ratios, Debt Ratios and Liquidity Indexes Ratios to determine the weight of each security within the index portfolio SWM Oil Sands Sector Index Cohen & Steers Global Realty Majors Index CLO CGR Current oil sands production Projected 10 years forward oil sands production Focus on oils sands production as percentage of total production Quantitative and qualitative screens are used to identify global real estate companies that the index provider believes is likely to lead to the global securitization of real estate 24

25 Intelligent Sector Performance Annualized Returns COW MOO 1 Year 21.79% 19.42% 2 Year 22.26% 24.32% 3 Year 2.28% 0.45% Standard Deviation COW MOO 1 Year 18.48% 21.71% 2 Year 15.51% 18.26% 3 Year 22.43% 26.61% Source: Bloomberg as of 3/31/11. Both COW & MOO returns are in CAD 25

26 Examples: Intelligent Indices for Dividends Index ETF Example Consideration S&P/TSX Canadian Dividend Aristocrats CDZ Simple methodology of investing only in companies that have increased their Index dividend or distribution consistently for the last 5 years. Zacks Global Multi-Asset Income Index CYH Multi asset class strategy that seeks dividends id d and income with a defensive overlay based on numerous factors within a proprietary model 26

27 Intelligent Dividend Performance Annualized Returns CDZ XDV 1 Year 16.39% 12.95% 2 Year 36.21% 32.30% 3 Year 7.60% 6.77% Standard Deviation CDZ XDV 1 Year 8.77% 10.20% 2 Year 13.51% 14.72% 3 Year 20.31% 18.27% Source: Bloomberg as of 3/31/11 27

28 Examples: Intelligent Indices for Commodities Index ETF Ticker Consideration Auspice Broad CBR Invests in 12 commodities from the Commodity Total Return Index energy, metal and agriculture categories and applies risk reduction methodology: 1. Roll optimization to reduce the negative effects of contango 2. Rebalances monthly to reduce volatility and spread risk across the commodities 3. Uses 100 day trend to reduce/add exposure to commodities 28

29 Intelligent Commodities Performance Annualized Returns Auspice Broad Commodity TR Index DJ UBS Commodity Index S&P GSCI TR Index 1 Year 35.61% 29.29% 14.20% 3 Year 15.58% -5.01% % 5 Year 20.00% 2.69% -5.37% 10 Year 17.18% 7.13% 3.01% Source: Bloomberg as of 3/31/11 29

30 Intelligent Commodities Performance Standard Deviation Auspice Broad Commodity TR Index DJ UBS Commodity Index S&P GSCI TR Index 1 Year 13.92% 17.72% 22.63% 3 Year 12.88% 23.64% 31.22% 5 Year 12.67% 20.79% 27.32% 10 Year 11.68% 17.70% 25.09% Source: Bloomberg as of 3/31/11 30

31 Characteristics of Index Strategies Example Market Cap S&P/TSX 60 Index Selection Bias Price Equal Weightings Style Bias Market Cap Equal Weight Fundamental Intelligent S&P/TSX 60 Equal Weight Index FTSE RAFI Canada Fundamental Index Fundamental Factors Equal Fundamental S&P/TSX Canadian Dividend Aristocrats Index Factor Based Asset class specific Growth & Momentum Small Cap Fundamental Asset class specific Portfolio Turnover Low High Low Asset class specific Diversification High Varies High Varies 31

32 Innovative Structural Enhancements to ETFs 32

33 Structural Enhancements of ETFs Tax Advantaged Structure Currency Hedging Additional Structural Enhancements of Claymore ETFs DRIP/PACC/SWP Advisor (.A) Class shares which h pay trailer fee 33

34 Tax Advantaged Structure The forward agreement associated with the fund converts interest income into return of capital and capital gains. The returns of the funds are viewed as cash transfers between institutions, and not realized capital gains, dividends, or interest income. ROC Distribution Example ROC/Cap Gains Distribution 5.00% Tax Rate 23.3% 3% After Tax Amount 3.84% Interest Equivalent 7.16% This process defers tax liability until the units are sold, or until the adjusted cost base reaches zero. 34

35 How Tax Advantaged ETFs Work 35

36 Claymore Advantaged ETFs ETF Name Ticker ETF Yield Interest Equivalent Yield Claymore Advantaged High CHB 7.19% 10.30% Yield Bond ETF Claymore Short Duration High CSD 4.93% 7.06% Income ETF Claymore Global Monthly Advantaged d Dividend ETF Claymore Advantaged Canadian bond ETF CYH 3.61% 5.17% CAB 3.30% 30% 4.73% Type of Income ROC/Capital Gains ROC/Capital Gains ROC/Capital Gains ROC/Capital Gains Distribution Frequency Monthly Monthly Monthly Monthly as of 3/31/11. Interest Equivalent Yield = the interest equivalent annualized yield a non-registered account investor would have to earn pre-tax to equal the ETF distribution based on highest marginal tax rate client in the Province of Ontario in 2008 of 46.4%. 36

37 Currency-Hedged Indices Two variables for a global investment I. Return of asset in local currency II. Currency exchange Currency Hedged ETFs Designed to provide the return of the underlying market without the currency risk Very unique and important for Canadians 37

38 Currency Hedged vs. Non Currency-Hedged Annualized Returns USD CAD 1 Year 16.95% 11.69% 3 Year 6.37% 4.35% 5 Year 4.92% 1.10% Risk-Adjusted Returns USD CAD 1 Year Year Year Source: Bloomberg as of 3/31/11 38

39 Things to be aware of Three costs to the execution of the currency hedge 1. Annualized cost for currency forward contract 2. Opportunity cost of currency 3. Interest rate differentials between two countries 39

40 Claymore s Award Winning DRIP, PACC, & SWP Programs Claymore was the first ETF provider in the world to offer investors DRIP, PACC, and SWP options on all ETFs DRIP Dividend Reinvestment Plan Allows existing Unitholders to compound their investment through the purchase of additional units. Commission i free way for investors to make regular contributions or withdrawals Winner of 2009 Canadian Investment Award for Best New Initiative PACC Pre-Authorized Cash Contribution Allows existing Unitholders to invest regularly l reaping the potential ti benefits of dollar-cost-averaging SWP Systematic Withdrawal Plan Allows existing Unitholders to sell a fixed amount of money from their holdings on a regular basis 40

41 Claymore Advisor Class ETFs Embedded Trailer fee on.a (e.g. CRQ.A) ETFs now can be used for Fee Based or Commission Accounts Inventory control - can use ETFs across entire book Reduce client cost compared to mutual funds Increase your revenue 1% on Wrap 0.75% on Equity 0.50% on Fixed Income 0.25% on Money Market 41

42 Summary Not All Indices are created equal Use the strategy that best suits your investment objective Advisor adds value by understanding the differences 42

43 Disclaimer This presentation is intended for investment professionals only. Although the information contained herein is taken from sources believed to be reliable, Claymore Investments Inc. ( Claymore ) does not guarantee the accuracy or correctness of this information. No representation or warranty, express or implied, is or will be made, and no responsibility or liability is or will be accepted, by Claymore or by any of our respective officers, directors, employees or agents as to or in relation to accuracy or completeness of this material or any other written or oral information made available to any interested party or its advisers and any liability therefore is hereby expressly disclaimed. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, management estimates, prospects or returns. This publication does not provide investment advice and is based on publicly available information. The information and opinions herein are provided for informational purposes only, are subject to change and should not be relied upon for any other purpose. This publication has been prepared without regard to the individual financial circumstances and objectives of those who receive it and the securities discussed in this commentary may not be suitable for all investors. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. poesso Any material contained in this presentation should not be considered a recommendation to buy or sell any securities. There is no assurance any fund will achieve its investment objective. Index returns do not represent fund returns. Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. The indicated rates of return are historical annual compounded total return including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus p before investing. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. 43