Exchange-traded funds may be primarily passive investments, but Douglas Hodge, chief operating officer of Pacific Investment Management Co. LLC, thinks investors should be active in using them to stay ahead of a changing investment landscape.
“Fat tails are all around us,” Mr. Hodge said Wednesday at the Morningstar Inc.'s ETF Invest Conference in Chicago. “Never forget about the downside. Use ETFs to remain agile and active, and never lose sight of the fiduciary duty to the clients you serve.”
(Plus: Douglas Hodge on how to weigh the choice between ETFs and mutual funds.)
One of the biggest advantages ETFs have over traditional mutual funds is their intraday liquidity. Unlike mutual funds, which can be bought and sold only at the end-of-day net asset value, ETFs can be traded during the day, so investors can switch asset classes or strategies quickly.
At the heart of the need to stay active is the unreliability of historical correlations. The second quarter of this year, for example, was the 10th-highest correlated quarter ever, thanks to tapering fears.
Correlations jumped four times as high as they were at the beginning of the year after Federal Reserve Chairman Ben S. Bernanke in June mentioned the possibility of tapering the Federal Reserve Bank's bond-buying stimulus program, Mr. Hodge said.
“Empirically, some basic assumptions just don't hold up,” he said.