Credit: Shutterstock photoThe actively managedAdvisorShares Rockledge SectorSAM ETF ( SSAM ) departs for ETF heaven this week after a brief 18-month life because of poor performance and its failure to attract investors.
Like a tree that falls in the forest when no one is around, its death will go unnoticed. SSAM had merely $1.2 million in assets under management -- hardly more than it was seeded with when it began trading in January 2012. It stopped trading on June 14 and will be liquidated June 21.
Its eulogy would be hard pressed for kind words. It lost 5% year to date, through June 13, and 7% in the past 12 months, according to Morningstar .
Its peers in Morningstar's market neutral fund category on average returned 0.46% and 0.66% year to date and over 12 months. The benchmarkS&P 500 ETF ( SPY ) gained 16% and 27% over the same periods. It charged a rather exorbitant annual management fee of 1.51%, trumping the average mutual fund fee of 1.34% and three times higher than the average ETF ratio of 0.52%.
"We determined that it was in the best interest of shareholders to close SSAM due to its performance and associated costs," Noah Hamman, CEO of AdvisorShares said in a statement.
"Sector Scoring and Allocation Methodology"
SSAM stood for "Sector Scoring and Allocation Methodology." It used "a robust proprietary quantitative sector selection and rotation quantitative analysis ... by successfully forecasting the relative strength of sectors within the S&P 500 index," Rockledge Group claimed on its web site.
In other words, it had a secret formula for buying sector ETFs that would outperform the market while shorting those expected to underperform. The techniques were "acquired through years of experience in managing institutional products," the Web site stated. SSAM was marketed to "minimize risk" with a mandate to go 100% long and short at the same time in hopes of profiting during stock market uptrends and downtrends.
Co-founder Alex Gurvich had the resume suggesting a quantitative genius: an undergraduate degree in physics, a masters in financial engineering, an MBA from INSEAD, a stint as a physicist at Harvard University, a professorship in finance at Pace University and experience as an institutional investor at various firms. He spoke on panels at ETF conferences.
But the strategy failed to work in a market that's been going up straight for the past year and rising faster and higher than average, said Hamman of AdvisorShares, based in Bethesda, Md.
"It may have done better in a choppy market or by going through a complete market cycle," he said. "But investors don't have the patience for a product like this to show returns."
Gurvich did not return calls for this story.
As of June 13, it large short positions inConsumer Discretion Select Sector SPDR ( XLP ),Financial Select Sector SPDR ( XLF ),Health Care Select Sector SPDR ( XLV ), which returned 17% to 20% year to date, according to Morningstar. Losses from those ETFs trumped gains in its largest positions,Consumer Staples Select Sector SPDR (XLY),Industrial Select Sector SPDR (XLI),Energy Select Sector SPDR (XLE) andTechnology Select Sector SPDR (XLK), which added 8% to 16% year to date.
The portfolio had an annual turnover of nearly 400%, which means it changed all of its holdings four times a year.
The Moral of The Story
1. Investing is third-grade math and common sense. Alan Rosenfield, managing director of Harmony Investors of Scottsdale, Ariz., learned from his grandfather, a CEO of Chattanooga Gas in the 1940s and a successful stock investor. So-called "proprietary models" named in commercial-ese and corporate jargon don't give you an edge.
2. Sophisticated quantitative models are based on historical data and just because A plus B led to C in the past doesn't mean that it will in the future because the market environment is always changing. Quant models use algorithms that make assumptions but if the assumption isn't right, the algorithm won't work, said Rosenfield, who oversees $25 million in assets.
3. Investing is part science and part art. "The good investors can do something that can't be trained," said Rosenfield. High IQs, degrees and credentials don't correlate with success.
4. The Federal Reserve's unprecedented massive quantitative easing program, pumping money in the financial markets, coupled with central bank easing worldwide has completely changed the fundamentals of investing.
Fed Chairman Ben "Bernanke has bastardized the system," said Rosenfield. "Why does (the stock market) move on what Bernanke is going to do rather than earnings!"
Corporate sales and earnings growth are slow while margins are shrinking and companies aren't hiring, he added. Thanks to record low interest rates, companies can borrow money cheaply to buy back shares, thereby boosting earnings per share.
5. Wall Street goes through fads, churning out new products to make fast money, just like Madison Avenue. And just like acid-washed jeans, they're all the rage until they're not. Last year 100 ETFs followed in the footsteps of New Coke and the solar-powered flash light. This year have been more than 30, according to Zacks Equity Research.
Follow Trang Ho on Twitter@TrangHoETFs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
