Stein: The Trend Is Still Up

Jason Stipp: I'm Jason Stipp from Morningstar, reporting from the First Annual ETF Invest Conference.

Where to invest in today's economy?

I'm here with Rob Stein; he is a senior portfolio manager at Astor Asset Management. They look at some macro economic issues when deciding where to put their money. And he is here to tell what he is seeing today.

Thanks for joining me, Rob.

Rob Stein: Thank you, Jason.

Stipp: First question for you, you guys do have a model that looks a lot of macroeconomic factors and you invest based on some of the things that model is telling you.

We've gotten a lot of mix signals recently about the economy, some good, some bad; the market has been up, it's been down.

What are you seeing? What is your model seeing about where we are in the recovery and its sustainability--areas of strength, areas of weakness?

Stein: Sure. And you make a very good point. The data has been mixed of recent; some of it's been a little better, some of it not quite as good as we would expect. But the overall trend, even the negative data, is still better than when it was six, nine, 18 months ago.

So it sort of sticks with the trend that things are better, albeit not as strong as we would like, but the trend is still up. So, looking for opportunities in specific ETFs that show signs of recovery and growth over the entire market: that's what we're trying to focus on. We're looking for the sectors that are demonstrating some employment growth, more or so than the whole economy, and some output growth that are contributing to GDP.

Stipp: So what specific areas, as you're looking at potential areas of strength, have you been focusing on? What sectors or industries do show that kind of strength that we might see if the recovery does continue?

Stein: We like the health-care sector; we like the technology sector, and the energy sector, just to name three.

Additionally, an interesting phenomenon is occurring right now between the dividends that some of these stocks or some of these ETFs are distributing, and the yield on some of the Treasuries, the 10-years, for example. And we're finding very attractive opportunities in securities that are yielding fairly close to what a Treasury would yield with upside potential. In fact, the SDY, which is the S&P 500 dividend-yielding index, has not only outpaced the S&P itself, but it's up on the year when the S&P is flat on the year. And so I think it's very telling of how interested people are in capturing dividends.

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Stipp: Absolutely. On the downside, areas that you might be avoiding, areas that you think might be experiencing some weakness in the future. What are you staying away from?

Stein: We're staying away from the financials and the banking sector specifically, and the real estate sector. Actually, any sector that needed leverage, that is still digging its way out, does not look attractive from where we sit. Now, it obviously is more volatile because of the news of the day affecting those types of securities, but I think the long-term trend on those is still questionable.

Stipp: And I wanted to ask you a question about the execution of your strategy. You do use ETFs to invest based on what some of the models are telling you, some of your macroeconomic models. What have you seen as the benefits of ETFs? What have they brought to the execution of your strategy that's been beneficial?

Stein: Sure. And I'll take that in two-folds. There was the execution, the actual mechanics of it, and then there is also as an economist the ability to invest in a specific sector. Traditionally, you'd have to find a stock and that stock would maybe do well or maybe not depending on what's going on in the overall economy. And with ETFs you can get, these days, very specific. You can see sectors that are actually going up when the economy is faltering, and we have the ability to create diverse portfolios using ETFs, and then there is the whole list of non-equity ETFs, which, of course, can help balance out the portfolio.

But from a technical standpoint--and when I mean technical, the actual execution of the portfolio--as ETFs become more and more liquid, it's incredibly more efficient to make these transactions. And additionally, the way ETFs are created through redemptions and creations makes the portfolio manager's job much easier than traditionally when you'd have to sit on the bid of a stock or make a dozen phone calls to try to get some of that stock at a specific price. You can always do a creation in the ETF world and be fairly certain of the price.

Stipp: Given that ETFs are still relatively new in the marketplace, have there been any surprises or downsides using ETFs, or something that investors really should keep in mind if they are using ETFs to execute their strategy?

Stein: Sure. Jason great point, because you want to make sure that you're getting what you think you're getting. In fact, we experienced something at the end of last year where we had purchased an ETF to get a specific exposure, and it turned out that the way the ETF was constructed internally, we weren't getting that type of exposure. And of course the news on the inverse and the levered ETFs as well.

So, my advice would be to make sure that the ETF is tracking what it is that you want to invest in. That would be my first advice.

I know there is a lot written and discussed about the internal cost. At the end of the day if your investment is so sensitive to somebody's ETF that has 12 more basis points in it, it's probably not the best investment. I am not suggesting pay more when you don't have to, but don't let that be the overwriting factor in your investment thesis.

Stipp: Rob, very interesting insights, interesting strategy. Thanks so much for joining me today.

Stein: Thank you.

Stipp: From Morningstar, I am Jason Stipp. Thanks for watching.