Shelley Bergman: Portrait of an ETF Strategist

“Properly investing with ETFs requires research, understanding and vigilance,” the FA stresses. “If the captain of the ship doesn’t know what they’re doing, ETFs are worth nothing.”

He pans advisors who, instead of focusing on long-term, broad-based allocation, trade ETFs too often simply because it’s easy.

“Greed, fear and gambling seem to overtake a lot of investors,” he says. “They’re turning over the portfolio more often than they [ordinarily] would based on their thoughts about a particular sector.”

Excessive Expansion

The savvy Bergman, who got himself Series 7-registered as a college senior cold-calling afternoons for an independent brokerage, is a sharp critic of the ever-expanding ETF world of products. There are now about 1,500 funds, as of July of this year.

“ETFs have come a long way; and because of that, if you’re not educated, there’s more and more confusion about what they are,” says Bergman, who, after graduating from the State University of New York at Buffalo with a B.S. in business administration-concentration in finance, worked at Janney Montgomery Scott for three years before joining Bear Stearns. He believes firmly that there are far too many ETFs, far too many providers and not nearly enough transparency.

“Unless you can really dig down and get the providers in [to see you], for the most part you’re bombarded with a smorgasbord where everything looks good until you taste it. They’re trying to come out with an ETF for every single asset class. A lot of ETFs aren’t good. A lot of ETFs overlap. Unless you read the fine print and meet with the managers, it’s a black hole.”

For instance, Bergman continues, “there are some ETFs that say they’re covering financials; but when you look at them, they may be insurance stocks rather than banks. Some may have as much as 30% in, say, J.P. Morgan or Wells Fargo. So an ETF may not be broad-based. One that’s labeled ‘consumer discretionary’ may have just a bunch of retailers when you thought you’d find a travel company or a leisure firm.”

All in all, advisors must beware of “ETF traps,” Berman warns. He cites a popular Japan ETF, iShares EWJ, that at one point had been touted widely in the financial press but, he says, wound up doing poorly.

“It wasn’t hedged, and the currency moved against investors. Though they got the move right, they didn’t realize they were going to get hurt on the currency. A competing ETF—from Wisdom Tree—that was getting no press, was hedged.”

Bergman dismisses as “gimmicks” many entrants in what he considers to be a bloated, growing mountain of ETFs. Actively managed funds, especially, come under his attack.

“We don’t believe in them,” he says. “They seem like an oxymoron: The whole reason most people use ETFs is because they’ve realized that the traditional managers are underperforming their benchmarks.”

Neither will Bergman buy inverse or leveraged ETFs. Designed to match the performance of the underlying indexes for a day, this type of fund is rebalanced so that it can again meet its objective of matching the performance of its underlying index for the next day, as Bergman Group portfolio manager Kurt Walters explains. Thus, “in a [volatile] sideways-moving market, whether you’re levering up or levering down,” he says, “you’ll lose money.”

Bergman stays clear of exchange-traded notes (ETNs) as well. These products are backed by the credit of the underlying brokerage firm. The risk, he says, is that “even though you can make a bet on the note in the right direction, if the note holder is a brokerage firm that should go under, like Lehman Brothers, you’ll run into trouble.”

What’s on the horizon for ETFs? Bergman forecasts major provider consolidation. “The big will get bigger; the smaller ones will get absorbed or go out of business,” he says.

But FAs will use ETFs to an even greater extent, Bergman predicts. “They’ve realized that over 10 or 20 years, most managers don’t beat their indexes, and the fees for ETFs are dramatically lower.”

This means that “advisors will need to become more educated and have some reasoning as to why an ETF will provide good coverage of a specific sector versus going out and having a manager do it for you. If I showed you the book of ETFs that Morgan Stanley, Goldman Sachs, UBS or any firm puts out, your head would spin.”

Bergman helps educate clients about ETFs with an eight-page ETF brochure that he created. It features a summarized version of his portfolio strategy, highlighted by easy-to-understand pie charts and a clear explanation of benefits.

“To me, this is a very simple business,” says Bergman, alluding to investing in general and ETFs in particular. “Over time, a broad-based portfolio will go only one way, and that’s up. If you’re not overweighted in any one asset class, you cannot lose in this game. We just went through the worst bear market but are now at an all-time high. If you had broad-based exposure through indexes, you hit the cover off the ball.”

Sidebar-What Bergman Likes

For the first time in four years, contrarian investor Shelley Bergman, senior portfolio manager of The Bergman Group at Morgan Stanley, in New York City, has added financials to his ETF holdings.

“Most of the financial stocks have underperformed for the last two to three years, but we feel there’s going to be a major consolidation among banks in this country,” he says. “Though we don’t see interest rates going up anytime soon, we believe that some of the larger banks will begin to lend again. The economy is improving. Net interest margins will come back eventually.”

Another top Bergman pick is the commodity sector, in which he recently bumped up his ETF position.

“We like this sector at a time when everybody is telling you there’s no inflation and you shouldn’t own a lot of commodities. But we like them because they’re too cheap. We love sugar and wheat and corn [etc.]. The world has to continue to eat, and these prices are at five-, 15-, 20-year lows.”

But, the advisor emphasizes, investing in broad-based commodity funds is the route to success.

“Many commodity ETFs will be 30% top-heavy oil and gas. So if corn, wheat, gold, silver [and other commodities] go up, and gas and oil stay flat or go down, you’ll lose money. But if you buy a broad-based ETF that has only 2% or 3% in each commodity, if oil and gas go down, you’ll probably make a lot of money.” —JWR