I nvestors and financial advisors arrived at Morningstar's annual ETF conference in Chicago Wednesday, eager to learn how to juice returns and navigate risk in stock portfolios. Those perennial investing goals are in sharper focus than ever in a year when the broad U.S. market has sagged more than 7% under interest-rate jitters and global slowdown fears.
In a series of breakout sessions, panelists and audience members discussed some key trends in investing in exchange traded funds.
The average value investor underperforms the average value fund because of their own buy-and-sell timing decisions and trend-chasing approach, not because of manager performance, said Jason Hsu, co-founder of Research Affiliates. For many investors, their own poor timing and "investment naivete" means buying after an ETF's momentum has passed or selling right before the reversion to the mean happens, he added.
"People make bad decisions all the time and everywhere," Hsu said.
So how should you invest in a value fund?, someone in the audience asked.
"The right decision is to buy what's underperformed," Hsu replied.
Hsu's California-based firm is a thought leader in the smart beta industry, having created innovative Fundamental Index strategies that seek to outperform traditional benchmarks while offering a value tilt and slight small-cap bias.
"Value investors are supposed to be contrarians" who buy unloved stocks and sell out of the popular ones, Hsu said. In the same spirit, value-oriented ETF investors ought to sell outperforming value funds and buy the underperformers, he advised.
Value investing came in for some more love in another morning session examining different approaches to dividend income. The panelists debated the merits of yield vs. growth strategy while investing in dividend-paying stocks.
Jeremy Schwartz, a director of research at WisdomTree Investments, said that his firm's suite of dividend ETF strategies launched in 2006 as a "true alternative to (market) cap weighting" that periodically rebalances back to value.
Schwartz also pointed out that most dividend growth ETFs tend to have backward-looking stock-selection screens, unlike WisdomTree's ETFs.
WisdomTree Total Dividend ETF's ( DTD ) No. 1 stock holding isApple ( AAPL ) -- a relatively new dividend payer, missing from popular dividend growth ETF investment strategies that require holdings to have paid dividends for several consecutive years.
DTD has beaten 75% of all active managers in the dividend category since inception, Schwartz said, adding: "It's a rules-based process. There's something to this tried-and-true, predictable strategy."
But it's worth it for investors to research the 25% of managers who performed even better, countered Ramona Persaud, manager of $7.8 billion Fidelity Dividend Growth Fund .
"My goal is to generate the best risk-adjusted alpha over time," she added, noting that stocks in her funds are screened for value, quality and capital appreciation.
Scott Kubie, chief investment strategist at CLS Invest, suggested that financial advisors should examine whether the overall approach of the dividend ETF strategy makes sense and "how those rules will drive sector allocations over time."
DTD, for example, makes sector bets such as overweighting consumer defensive stocks and underweighting financial services.
The dollar's rise has gouged many investment portfolios while driving explosive growth in ETF strategies that hedge foreign currency risk. A third panel at Wednesday's conclave examined whether currency hedged ETFs are a fad or a trend with legs.
Currency hedging not only boosts portfolio returns when the dollar's in an uptrend, but it also can reduce volatility risk, said Luciano Siracusano, chief investment strategist at WisdomTree.
Panel moderator Patricia Oey of Morningstar asked how Siracusano would recommend adding currency hedged ETFs to a portfolio.
"It should be part of the overall allocation," Siracusano said. For investors without a strong view on the dollar's movement, "you probably want to get close to 50-50" on hedged vs. unhedged investments in international stocks, he added.
WisdomTree Europe Hedged Equity ( HEDJ ) fell 2% in the past year as the dollar rose vs. the euro, while the unhedged MSCI Europe index dumped 9%.
Follow Aparna Narayanan on Twitter: @IBD_ANarayanan .