A Generational Shift In the Investment World


A Historic, Generational Shift In the Investment World

Most individual investors remain unaware that the investment world is in the midst of a generational shift of herculean proportions; a change that is no less than the most massive, fastest transfer of wealth in human history.  We are witness to the rapid abandonment of traditional, active investing, using mutual funds and individual stocks – products that have dominated the investment world for a century – in favor of relatively new, passive, index-based products, primarily represented by Exchange Traded Funds (ETFs).  

Some compare active investing to betting at the beginning of the season on who will win the Super Bowl many months later. Continuing with this analogy, passive, index-based investing would be like owning the entire NFL, and thereby collecting profits on ticket sales, merchandise, TV rights, and more – regardless of which team wins each year. Under which scenario is there a higher chance you will make money at the end of the season?

The answer is obvious, and while it may not include the exhilaration of your team winning the Super Bowl, it also doesn't include the grief that comes after the team you selected with hard-earned cash doesn't even make the playoffs. But what responsible person wants to place bets on a stock "winning the investment Super Bowl" each year as a viable way of saving for retirement? Tens of millions of investors are concluding that in the long run, they would rather have the investing equivalent of "owning the entire NFL" as a way to build wealth.

In fact, in 2017 investors did just that, with nearly $1.3 trillion flowing into passive, index-based funds while almost a half trillion dollars of assets drained out of active funds, and the pace continues to accelerate each year. When you start discussing figures with 'trillion' at the end, you're talking about an enormous amount of money. In fact, what's occurring is the most mammoth migration of money in the history of humanity. But what phenomenal force could prompt this immense transfer of wealth from one investment vehicle to another?


The primary driver of this galvanizing refashioning of the investment industry has been the embarrassing failure of professional mutual fund managers and self-managed investors to attain a decent return on funds over many decades. Failure can be a powerful motivator. 

Embarrassing Fact #1:  94% of mutual fund managers underperform the broad market over 10-year periods. Over 30-year spans the stats are even worse: 98% of fund managers underperform the market – and the last 30 years were not particularly unique, as this dismal record has been the case for many consecutive decades. 

Embarrassing Fact #2:  The average investor using a blend of equity and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the last 10-years. Moreover, over more extended time periods the results aren't any better. The 20-year annualized performance is 2.5%, while the 30-year annualized rate for the average investor is just 1.9%. That's just plain bad, especially when you consider that the most well-known stock market index (the S&P 500 large-company index) grows by an average of about 7.5% per year.

10-year annualized returns of various investments | ETF Optimize
The 10-year annualized returns of various investments significantly outperform the average mutual fund return.
Click to enlarge.

The move to passive, index-based investing is also driven by self-managed investors finally realizing that when they try to beat the market,  all too often they end up losing money. The average individual investor has 'achieved' a long-term return, when considering inflation, of -1.16%.  That's a NEGATIVE -1.16%! Even if you don't consider inflation, the average investor attains a return that is only about one-third of the long-term return of the S&P 500 large-company index.

Apparently coming to this realization in the last decade and at a steadily increasing pace, investors are rapidly embracing low-cost, passive investment products such as Exchange Traded Funds (ETFs). These products hold ownership in all the companies in a market index and can be used with a simple buy-and-hold approach that minimizes costs and dramatically reduces the time and effort expended.

Passive investors want to own all the stocks in the market or a market segment, because 1) it provides instant diversification and 2) they believe as a whole, capitalism works, and 3) they know from the previous statistics mentioned that they are more likely to gain higher returns by investing in the entire stock market (or significant segments of the market) than they are in trying to determine which individual stocks will outperform the market (or when the proverbial "Super Bowl").

Instead, these investors have realized they can buy a few passive, index-based ETFs, hold them for decades and capture the return of the entire market as it steadily rises with the forces of societal growth and entrepreneurial innovation. Fees are minimal and effort required is virtually zero. For the vast majority of investors, this is the choice that makes the most sense.

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Playing a prominent role in today's migration to passive investing is the significant difference in the level of fees for ETFs versus the fees for mutual funds, hedge funds, and other active approaches. The average ETF carries an expense ratio of 0.44%, which means the fund will cost you just $4.40 in annual fees for every $1,000 you invest. In contrast, the average mutual fund expense ratio is about 1.45% in stated fees – more than triple the cost of ETFs – according to a recent study published in the "Financial Analyst Journal."

While a 1.45% fee may not seem like much, it alone can trim a retiree’s nest egg from $1,199,093 to $904,081 – a cost of $295,012. Those figures assume a $10,000 investment per year compounded at (a very generous for a mutual fund) 7.5 percent annually for 30 years. That 1.45% average mutual fund fee would reduce by nearly 1/4 the amount you would have at retirement! Now here’s the real kicker: including all of the hidden fees associated with mutual funds, the total cost of ownership can be 6.22% annually for a taxable account, according to a September 2016 Forbes piece, "How Much Do Mutual Funds Really Cost?"

(Learn more about the advantages of Exchange Traded Funds.)


For investors who want to avoid market selloffs, attain superior performance compared to what passive, index-based ETFs provide, and are open-minded, many are surprised to discover that there is a better way – one that is counter-intuitive; with even less risk and accompanied by far higher returns. You can attain these objectives by taking advantage of another relatively new development in the field of finance: Systematic Investing (SI).

Systematic Investing (SI) is computerized, tactical asset allocation in which the three primary asset classes (stocks, bonds and cash) are actively balanced and adjusted, seeking to maximize portfolio returns and minimize risk. Modern Portfolio Theory states that asset allocation has a more significant impact on portfolio returns and market risk than individual investment selection. Financial advisors and investors who use tactical asset allocation are looking at the "big picture" as opposed to selecting an investment based on company fundamentals alone, as is usually done with bottom-up stock picking. (Learn more about Systematic Investing.)

While some might be concerned that this approach is just adding dangerous activity back into the advantageous, passive aspect of index-based ETFs, that's not the case. With systematic investing, selection of an asset is determined by pre-constructed algorithms based on well-vetted market signals and robust correlations that are never overridden by discretionary decisions. The result is still a methodical index with rules-based construction criteria and the retention of all the benefits of ETF investing. 

Here's How It Works:

Beneath the surface of the stock market, there is a dynamism with which most investors are unfamiliar. This aspect, a distinct component of the market for nearly 70 years, involves a systematic rotation of funds flows into various asset classes at different points in the business cycle.

Our "Asset Allocation: Dynamically Levered S&P 500/Fixed Income" strategy produces a return of 1001% during a time when the S&P 500 gains just 155%. This strategy makes money when the market heads downward and doubles performance during rallies.


The natural cycles of business expansion and contraction cause a regular rotation of performance from one component to the next, which results in fund flows into - and out of - multiple sectors, industries, and asset classes as investors seek the highest return possible from their money. This incredibly compelling aspect of the market is hidden from the view of most investors and harbors an extraordinary opportunity for profits by those who are shrewd enough to take advantage of it.

The timing of these rotations is driven by a variety of forces, with the most prominent one being the familiar business cycle. As each new business cycle begins, matures and contracts before becoming another fresh cycle, specific sectors, industries, and asset classes rise and fall in a particular order. It's a little-known fact that exploiting these secretive rotations fuels a significant percentage of the profits banked by the top echelon of investment pros.

ETFOptimize has created a breakthrough in modern systematic investing by harnessing 28 different macroeconomic and market factors to determine each of our strategy's computerized ETF selections. This approach is unique because it requires a high level of sophistication and complexity to mesh the multiple components effectively. Typically, automated Systematic Investment strategies use only one or two factors, such as momentum, value, or quality – the 'big three' that dominate academic literature and real-life investing.

The advantage is that our multi-faceted, multi-factor approach is far more accurate and far more capable of minimizing drawdowns and maximizing returns than a conventional one- or two-factor approach. Please click this link to see some of the factors we include in our strategy ranking systems: Learn about ETFOptimize's breakthrough approach to Systematic Investing =>

Throughout the world, there are probably only a few dozen smart money investors, most at high levels in investment banks, who quietly monitor these clandestine rotations and invest at the most opportune time, allowing them to reap outsized profits year-after-year, over many decades. Usually, the average individual investor either can't identify the market's hidden tells or doesn't understand how to exploit these secretive rotations to achieve consistently exceptional performance. Nevertheless, you can put these unique capabilities to use for you today, just by selecting a strategy from our ETF Investment Strategy Suite.


The secret to getting higher returns with less risk is straightforward; to really succeed with passive investing, you just need to add a little activity. That doesn't mean rapid-fire speculation. In fact, quite the contrary. To reap long-term returns that are double, triple, or even quadruple a buy-and-hold approach, you just need to rotate from one ETF to another a few times per year, as determined by our carefully crafted ETF rotation strategies.

Puting these internal market rotations to work can make a profound difference in your life:

The ETFOptimize team has carefully crafted a selection of turnkey ETF investment strategies that take advantage of the hidden rotations in the markets, with each strategy featuring exceptional performance with minimal drawdowns so you can effortlessly achieve your retirement or other long-term savings goals.

Returns for the ETFOptimize Strategies range from 15% to 35% average compounded growth per year with 100% of all years profitable (57 of 57 total years) across all strategies. On average, we reduce max drawdowns to less than 1/4th of what the overall market experiences across the span of a strategy's long-term performance (since inception). When a severe selloff or bear market begins, our systems have already rotated into cash or the optimum defensive ETF, thereby turning the tables and transforming every market downturn into an opportunity to add profits.

The focus of all our efforts with ETFs is to make it simple for you to attain outstanding investment returns - increasing your long-term results by a multiple of double, triple, or even quadruple over what the average investor accomplishes on their own. Also, we don't take on more risk to get those improved results – our strategies reduce risk while achieving higher returns. Plus, we make each approach easy to understand and simple to execute, even for novice investors who are hoping to build their nest egg at a pace that will successfully achieve their wealth-accumulation goals. 

Visit our ETF Investment Strategy Suite


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