We have heard other people say that markets are efficient and that everyone should “index” their money. That is, everyone should buy a few index funds that cover US and Foreign Stocks and maybe some bond indexes and simply buy and hold. At ETFMI, we politely disagree. We like indexing – don’t get us wrong – and we believe that markets are efficient over extended periods, but we know that they are not necessarily “efficient” in the short term.
As we all are aware, sometimes the irrational and misguided behaviors of humans create prices in the market that are too high or too low. Markets are efficient, but only until irrational humans start interacting with them. We specialized in identifying these periods in the market when human behavior starts to create mispricings.
Our systematic rotation process uses global indexes to exploit “Momentum”, a timeless market inefficiency. We consider the “Momentum Inefficiency” to be timeless because it results from predictable emotional human behavior and human nature never really changes.
As far as exploitable market inefficiencies go, there are just two that have stood the test of time, Value and Momentum.
We prefer Momentum over Value and Indexing. Historically, our type of intermediate-term momentum investing: rotating from one global index to another in search of the best bull markets, has delivered better performance than either, with smaller portfolio losses in bad years for the last 8.5 years (according to our backtests)