Planning Ahead: Focus on Valuation
What is the biggest concern for advisors today?
ED LOPEZ: I think one of the largest concerns that advisors may have today is valuation. I'm not talking about just valuing growth or other factors, I'm talking about something that transcends that. By valuation I mean the price that you pay for the securities that you invest in. Not the expense ratio of the funds, but of the underlying. We're in a one of the longest bull markets ever. It has gone eight or nine years now, into probably the second longest bull market. You see it in the press every day: Is the market overvalued? Is it going to fall apart again? What we do know is that in the last 18 years there have been at least two major market events where you saw declines of over 40%. And that's a big number to overcome and to recoup.
How should investors plan for the future when the bull market ends and volatility rears its head?
I think that at this juncture, at this time, valuation is an important consideration because, as an advisor, you know you have to invest your clients’ money in equities. They have to be invested in equities, but when do you pull back? If you stay out of the market you're missing a long bull run. But if you put them into the market and allocate it and the market tanks, then that also looks bad. One of the underlying elements in this valuation consideration is the big migration from mutual funds to ETFs. Back in the day, as an advisor you might put somebody in a mutual fund and if that fund or the market tanked, you had somebody to blame. Now you're using ETFs, the market tanks, that allocation decision was yours.
What are examples of the types of ETFs VanEck has launched to help investors?
With this valuation idea in mind, and the potential of coming volatility in the market, VanEck has launched a number of different ETFs. One is our VanEck Vectors Morningstar Wide Moat ETF. This is your “smart shopper” ETF. The ticker symbol: MOAT. It uses proprietary stock selection from Morningstar and then only picks those companies with the best price to fair value ratio. So basically the cheapest, high-quality stocks. That is being a smart shopper. We have not only the U.S. version of that, but we also have an international version, the VanEck Vectors Morningstar International Moat ETF. The ticker: MOTI.
The second solution that we've launched falls into the camp of “Hope for the best, plan for the worst”. This is the VanEck Vectors NDR CMG Long/Flat Allocation ETF. [Ticker: LFEQ] What this ETF has and offers is a rules-based mechanism to provide core equity exposure. You have exposure to S&P 500, but you also have a rules-based process to “step” you out of equities and into cash if the market starts to look weak. It is based on a model developed by Ned Davis Research – hence NDR. It basically stitches together a mosaic of market health, industry by industry. As the market starts to weaken it will step out 80% to equities, 40% to equities, and then zero percent. But it also has that rules-based mechanism to allow you to step back into equities when the time is right, taking out all the emotion.
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Fair value estimate: the Morningstar analyst's estimate of what a stock is worth. Price/Fair Value: ratio of a stock's trading price to its fair value estimate.
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