MAM 186: Tim & Tom Talk Everything ETF’s – Transcript

Tom Mullooly :

Welcome to episode 186. That’s episode 1 8 6 of the Mullooly Asset Management podcast. This is Tom Mullooly. I’m here with Tim.

Tim: Hey, everybody.

Tom Mullooly : We want to talk about a topic that’s near and dear to our business, exchange traded funds. Before we walked in here to record this, I looked up and went as far back as I could on the mullolly.net website and I saw that I actually wrote about exchange traded funds in January of 2007.

Tim: Wow.

Tom Mullooly : We’ve owned them longer than that.

Tim: Right.

Tom Mullooly : In fact, when I was a broker, I owned shares of S-P-Y, SPY, the very first exchange traded fund for some family members, and I had to constantly explain to them for the first three or four years what this actually was. I don’t consider myself a pioneer, but an early adapter.

Tim: Good way to put it.

Tom Mullooly : Yeah. They have a lot of benefits, and that’s what we really want to talk about in episode 186. Tim and I have prepared a couple of questions. We haven’t gone over all of them, so we’re going to have a free wheeling discussion about exchange traded funds. Tim, I’m just going to throw this one out. We can answer each other’s questions or pitch on things that we may want to add for reinforcement, but why do you think advisors, and especially Mullooly Asset, are using exchange traded funds instead of buying individual stocks or mutual funds?

Tim: Well, to start off, addressing why we would buy that instead of stocks, first thing that comes to my mind would be the risk that comes with owning individual stocks. We’ve seen it all happen before. Names like Enron come to mind where stock out of nowhere just crumbles to the ground. An exchange traded fund being a basket of stocks, you can still give your clients exposure to certain stocks that they might want in their account, but having it all wrapped under one ETF, one ticker symbol, is a good way to dissipate the risk that one single company could potentially blow up someone’s portfolio.

Tom Mullooly : That’s a good way of putting it. I’ll also add to that that sometimes we’re going to see sectors move, and sectors are a lot like schools of fish.

Tim: Right.

Tom Mullooly : It used to be, when I was a broker in the ’80s, if oil looked good, we would buy Exxon. If technology looked good, we would buy IBM. If a sub-sector like semiconductors looked good, we would buy Intel. In our work with Dorsey Wright, we have been able to build these matricis that show the top performer from top to bottom. If we do it the old way and say, “Well, semiconductors are doing well, so let’s buy Intel,” and Intel’s at the bottom of the matrix, meaning it’s the worst performer or near one of the bottom performers in the group, you’re just not going to get that move.

We can capture the entire sector now. Instead of going in and trying to cherry pick which stocks are going to do the best, we can buy the whole sector when a sector’s going to outperform. One of the things that Tim brings to the meeting every week is this report on technical attributes and score direction. You want to talk a little bit about that?

Tim: Sure.

Tom Mullooly : Not really what we thought we’d talk about when it comes to ETFs, but it does help to paint the picture.

Tim: It kind of ties in. Right. Every week I run this report on Dorsey Wright, and they have their different rankings of scores that they give to each sector. One thing that you would like to see is a score direction being positive, meaning that it’s trending upwards or that sector has been performing better than other sectors in the past. I bring it every week.