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Portfolio > ETFs

ETFs Then & Now: Before They Were Popular

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Thought the first U.S. exchange-traded fund was launched around 1993, ETFs were still gaining traction in 2004 when Paul Frank launched his own ETF-based mutual fund.

Today, ETFs have become popular investment vehicles, hitting nearly $2 trillion in U.S.-listed ETF assets and nearly $3 trillion globally.

Frank’s fund, the Stadion Tactical Growth Fund, is one of a few ETF-mutual funds with a 10-year track record.

“It’s proven itself,” said Frank, who still manages the fund. “There’s been up markets and there’s been down markets and it’s done well.”

Stadion’s Tactical Growth Fund shifts between domestic equity ETFs, international equity ETFs and a defensive allocation based on its proprietary Sharpe Ratio analysis.

When he launched the fund out of his one-man RIA firm in 2004, Frank was one of the first managers to utilize ETFs within a traditional ’40 Act mutual fund.

“When I first launched it, I said ‘these ETFs are going to be big,’” Frank said during a visit to ThinkAdvisor’s office in New York.

He has since linked up with Stadion Funds in 2013, and over the last six months the fund has doubled its assets under management to more than $200 million.

While it had been on UBS and LPL platforms, just in the last month it made it onto Wells Fargo and Merrill Lynch platforms.

Frank recently talked to ThinkAdvisor about how ETFs have changed over the past 10 years and the current trends in the ETF marketplace.

More Options, More Money

In 2004, Frank’s fund was tracking “maybe 125 ETFs,” he said. Today, it tracks more than 1,300 ETFs on a daily basis.

The overall number of ETFs has increased and so have the variety and array of options within the ETF marketplace today, Frank said.

“The U.S. was covered pretty well in ETFs back in ’04,” Frank said. “Obviously there’s a lot more sector funds out now, they get a little bit more specific and drill down a little bit more. Back then you could still get your S&P weighted a couple different ways.”

Frank’s invests about three-quarters of its assets in U.S. equity ETFs and uses the remaining part of the fund to focus on noncorrelated or non-U.S. equity ETFs.

“That universe of ETFs has really expanded and it’s really helpful,” he said. Adding, “As far as giving me diversification opportunities, I have a lot more now than I had in ’04.”

Frank says the goal of the fund is “equity-like returns with lower volatility, so we need diversification in that other part of the fund.”

“Back in ’04, if I loved Indonesia … I could maybe buy a Pacific Basin fund and get a slice of Indonesia,” Frank told ThinkAdvisor. “Now there’s Indonesian funds outright; I have my choice of a couple different ones.”

Not only have the number of ETFs grown, but so have the assets in ETFs.

“The amount of money has helped a lot,” Frank said. “The liquidity and depth of some of these ETFs is really deep and much deeper than they were 8 years ago.” Trending Now

Frank has seen hedged international ETFs gain a lot of traction recently.

“That’s seen a huge influx of money,” he said. “This fund has owned it – not because of its popularity but just because in our quant rankings they moved to the top of our quant rankings.”

(The rankings the fund uses is based on its Sharpe Ratio analysis.)

Frank called hedged international “a great idea, especially when the dollar is rallying.”

“The last 12 months it definitely worked well with the dollar. If we’re going to raise rates it’s going to work well again. The dollar is going to rally and those hedged internationals are going to look very well,” Frank said, adding, “With QE in Europe kicking up, those hedged equities could have a ways to run.”

When the dollar is not rallying or going the other way, Frank said hedged interanationals “might not be the best idea in the world.”

“Sometimes you get your kick from the internationals through the currency, so sometimes it might not be the wisest move to hedge that,” he explained. “Over a long span of time, I would say it’s going to cost you a little bit of money to hedge, but at times it works well.

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