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Thursday, February 26, 2015

Germany Euro Hedged ETFs Deserve More Love"

Above is the headline from an article about currency hedged German stock ETFs an  ETF I have written about in addition to the more well known and larger (in assets) Euro Zone hedged ETF (ticker HEDJ)

The article includes this graph of EWG, the unhedged German stock ETF and 3 hedged Germany ETFs: HEWG, DXGE and DBGR. HEWG has $845 million in assets while DXGE has $63 milllion and DBGR has $75 million meanin HEWG is  far more liquid

Israel Enters the “Currency Wars”

On February 23 the Bank of Israel surprised the financial markets by cutting its base interest (equivalent to US Fed funds) rate to an all-time low of .1% and even indicated it would consider further "easy money" policies  through “quantitative easing. Thus it has joined the group of nations in a monetary easing phase while the Federal Reserve has ended quantitative easing and is expected –at some time in the near future—to raise rates. Such policies almost always have the effect of weakening a currency against those with a lower interest rate…as we have seen in the $/Euro rate. Hence the countries in the monetary easing mode are seen by many as in a “currency war” of currency depreciation vs. the US dollar to boost exports

The market reaction would not surprise anyone who has watched as central bankers around the world have cut interest rates. The Tel Aviv stock index hit a record high --after Germany, Japan and the total World Stock Index did so during the last couple weeks-- and bond prices jumped putting the yield on the ten year government bond down to 1.75%. The Israeli shekel (NIS) weakened immediately against the dollar and at the end of local trading on the 24th was at 3.9520 /$ vs. 3.8580 the previous day (based on the Bank of Israel data).

While the market movements: central bank easing, higher stocks, higher bonds/lower yields and weaker currency have been mirrored across the world, the Bank of Israel action has a significant difference. Most interest rate cuts have been primarily in response to recessionary conditions.  The recent economic growth numbers in Israel have been very positive.  Israeli GDP growth is strong at 7.2% (annualized) in most recent data   although the 2.9% GDP growth of the last year—a period that included the Gaza war and a massive drop in tourism-- was the weakest since 2009.The January inflation rate (CPI) declined by .9% but the central bank does not forecast future number to show deflation—although it is a concern.

What sets the Bank of Israel policy apart from the rest of the world’s central banks is the explicit mention of targeting a weaker currency. Certainly the Euro has weakened due to easing policies by the European Central Bank (ECB) and the same is the case for the Bank of Japan and the Yen. But neither of those central banks has officially acknowledged that a weaker currency—which helps exporters—is a goal of policy. It is impossible to target both interest rates and exchange rates: money flows to the higher yielding currency. Hence a weaker Euro and Yen in response to central bank easing designed primarily to stimulate local economic activity whether or not it has been identified as a major policy goal.

The Bank of Israel on the other hand seems to be doing the opposite targeting the exchange rate through lowering rates even without a need to stimulate local economic activity. This is understandable given the small domestic economy and the export intensive economy. The Bank of Israel has made clear that even a short term period of dollar weakness /NIS strength is a not only a concern it is a major rationale behind the rate cut and could lead to “unconventional methods” in future monetary policy.

From the Bank of Israel press release giving the rationales for cutting interest rates:
This month, the shekel continued its appreciation, strengthening by 2.6 percent against the dollar, and by 3.3 percent in terms of the nominal effective exchange rate. After a depreciation of 10.4 percent between August and December in the effective exchange rate, there has been an appreciation of 7.6 percent since December, so that the cumulative depreciation since August has only been 2 percent. Continued appreciation is liable to weigh on growth in the tradable industries—exports and import substitutes.

And later in the press release:
The Monetary Committee is of the opinion that in view of the increased rate of appreciation, and its possible effects on activity and inflation, reducing the interest rate to 0.1 percent is the most appropriate step at this time in order to support achieving the policy targets.

The Deputy Central bank governor was even more explicit
 Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said while the central bank was "relatively comfortable" with its 2015 growth forecast of 3.2 percent "we needed to ensure that no further (dollar-shekel) depreciation takes place."
"We had concern that looking forward, without the extra push, we would not necessarily maintain our growth estimate," Baudot-Trajtenberg said in an interview with Reuters 

NIS/$ (mm/day year format)
 Looking at the graph above (dates are in European format day/month/year) of the NIS/$ rate one can see how sensitive to the exchange rate changes the central bank is. Despite the large depreciation of the shekel since August, the slight retracement of the exchange rate was enough to concern the bank
As the Israeli newspaper Haaretz reports 
. Against the dollar, the shekel ILS= weakened by 15 percent between July and late January but reversed course and gained 2.6 percent in the month since the prior rates decision. More important to the central bank, the shekel's effective exchange rate had depreciated 10.4 percent between August and December but appreciated 7.6 percent since then.

Below is the NISl/Euro exchange rate where one can see that the aggressive easing policy by the European Central Bank has caused a sharp fall in the Euro/Shekel exchange rate hitting record highs for the NIS vs, the Euro.. With the European Union Israel’s largest export market it is clear that the Bank of Israel would have an interest in slowing the Shekel’s rise against the Euro, That will be a more difficult task as the Euro has been in a period of currency weakness due to its aggressive policy of monetary easing one that is expected to continue in the foreseeable future. 

NIS/Euro Exchange Rate (dates in mm/dd/year format)

Interest rate differentials are often a key determinant of exchange rates. This has often been true for the NIS $ exchange rate. during the period of aggressive easing by the Fed  the NIS was far stronger than current rates. As the Federal reserve lowered rates and the interest rate differential moved in favor of the NIS money flowed in from around the world into the shekel as it became one of the favorites of traders/investors interested in the “carry trade” moving money to higher interest rate currencies Previous Bank of Israel Governor (and now US Fed Governor ) Stanley Fisher followed a policy of central bank intervention  against a stronger shekel attempting to keep the exchange rate at a 3.40 to 3.80 range level.

With the latest rate cut to .1%  and ten year government bond yield of 1.75%, there is little room for a “carry trade” to profit from an interest rate differential vs the US $. Thus one factor that would lead to a stronger NIS no longer exist. There will be next to no likelihood of any speculative capital inflows into the shekel driven by interest rate differentials.

In fact the opposite is likely to be the case. Israel seems to be on the easing side of monetary policy alongside the European central bank and has even indicated it might engage in “quantitative easing” at some point. The next move by the Federal Reserve will be to raise interest rates with many analysts looking for that to happen as early as June. There is a large inflow of $ into shekels related to development of natural gas fields and this would accelerate when/if exports begin. But the central bank has been selling $ into the market to offset these inflows for a considerable amount of time already.

The combination of an easing monetary policy in Israel, a move to raise rates by the US and the Bank of Israel;s expressed desire to keep the shekel weak would argue for the Shekel to trade at current levels or weaker in the foreseeable future. The rate has seldom held much above the NIS 4.00 rate and many analysts see a move above that as unlikely citing “resistance”. But exchange rates are notoriously difficult to forecast. They often have a strong momentum factor. And rates seen by the market as “resistance” often cause strong market reaction in the same direction of the momentum when those “resistance “levels are broken

Has Israel entered the currency wars?  Here are the views of two analysts 

From  Bloomberg

The rate cut comes amid “a global currency war in which Israel cannot allow itself to lose its global competitiveness,” Shlomo Maoz , chief economist at S.M. Tel Aviv Investments Ltd., one of the three economists who predicted a rate cut, said by phone after the decision. It “signals to the market that the Bank of Israel will not allow an appreciation of the shekel” until the world economy rebalances, he said.

Tamir Fishman CEO Eldad Tamir writes, "The global currency war entails substantial steps to preserve a reasonable level of growth in Israeli exports, which are the cornerstone of the Israeli economy. In our view, if the figures don't improve, there could be a further interest rate cut, and we could even see the start of a quantitative easing program."

Wednesday, February 25, 2015

Update on HYLD

Update on HYLD
Hyld will be paying its February dividend on the 27th of $.28 after $.20 in January.  I calculate that as a bit under a 7% yield the twelve month trailing yield is 9.64%.   The price has recovered (currently at around 42) but not nearly enough to recoup the losses from last year’s 12.8% fall calculated based on total return: price change +dividend). The total return is -3%   for the last 2 years and +3.3% year to date. Below is a one year total return (measured as growth of $100,000) over 12 months

The oil price has stabilized for now and it seems the “market consensus “fickle as it is has turned more favorable to high yield bonds.
From Bloomberg 

The message from the junk bond market is that the world’s biggest economy is picking up.
The securities have returned 1.7 percent in February, headed for the biggest monthly gain in a year, Bank of America Merrill Lynch index data show. Treasuries are plunging as investors dump the haven assets they turn to in times of turmoil. U.S. government securities have fallen 2.1 percent this month, the biggest decline since 2009, according to the indexes.
JPMorgan Asset Management is recommending high-yield bonds as an alternative to the slim payments investors get from sovereign debt…..
Companies that were once investment-grade rated and have since plunged into junk territory are offering some of the best returns in U.S. credit markets.
The fallen angel securities have returned about 8 percent in the past 12 months, and 3.2 percent in 2015 alone, the Bank of America data show.
Junk bonds are high-risk, high-yield securities are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
They have an effective yield of 6.13 percent, versus 1.43 percent for Treasuries and 0.17 percent for German bunds, based on the Bank of America data.

  With the “weak hands” including many individual investors having sold their positions through ETFs and funds…the professionals are picking through the beaten down bonds to find the good values. HYLD is actively managed so they should benefit vs. an index. I don’t believe in active management in general but high yield at this point should give room for an active manager to do well.
Savvy professional longer term investors like private equity firms have been buying beaten down assets in the energy area. Blackstone group (BX) just set up a second fund to invest in this area.
My longer term expectation has been that short term high yield with its yield spread over investment grade bonds and treasury bonds and short duration should outperform the bond index over the near future and even perform well compared to relative to a highly values US stock market. Obviously that was not the case last year.
Things look better this year but certainly it is too early to say the worst is over. Oil is still a wild card risk and no one can rule out a further decline in oil prices.
Here are recent total returns
                            YTD    One year
Total US Bond    1.2          5.8
Total US stock    3.3          15.4
Hyld                     3.3         -12.8

Tuesday, February 24, 2015

Remember That "It's a Stock Pickers Market" Argument

Active managers apparently have a new excuse why their active management isnt't working...blame it on the market. I also fail to understand why performing poorly under difficult circumstances is a good excuse for a money manager.

from bloomberg

Best Stock Pickers Say Easy Money Has Made Their Job Harder

Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals. At the same time, the relentless climb of prices across equity markets has left them with few chances to sniff out bargains or show what they can do in more-volatile times.
“In straight-up markets you don’t need active managers,” D’Alelio said in a telephone interview. “If the next five years are the same, there won’t be any active managers left.”
Twenty percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, and 21 percent topped the indexes in the five years ended Dec. 31, according to data from Chicago-based Morningstar Inc. Over 10 and 15 years, the winners rise to 34 percent and 58 percent, respectively.

Of course hope springs eternal: 

, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in the firm’s 2015 outlook published in December.
“From our lens, this means a prolonged period of active investing is upon us, thereby overtaking the macro or index biased ways that have engulfed investing the past 15 years,” Belski wrote.

Regardless of whether the trend is turning, Jeff Tjornehoj, an analyst with Denver-based fund tracker Lipper, doesn’t buy the idea that certain types of markets are tougher on stock pickers.
“It sounds like a team complaining about the rain when everyone has to play under the same weather,” Tjornehoj said in a phone interview.
Jim Rowley, a senior analyst at Vanguard Group Inc., is also dubious of high stock correlation as an explanation. In each of the last eight years, at least 70 percent of the stocks in the broad Russell 3000 Index either beat or underperformed that benchmark by 10 percentage points or more, according to Rowley, whose firm is known for championing index funds.
“That would suggest there has been ample opportunity to pick winners and losers,” Rowley said in a phone interview.

But despite all the data on active fund manager underperformance don't worry:

This is setting up as an ideal environment for stock pickers,” said Neuberger’s D’Alelio.

Monday, February 23, 2015

Another One Joins The Bandwagon...

Now that European and Japanese stocks are near all time highs the research gurus at Goldman Sachs weigh in. Via Bloomberg

Goldman Sees Value Outside of ‘Stretched’ U.S. Equities

Goldman suggests investors look abroad.

“Stocks with attractive valuation are rare in the current environment of stretched share prices,” Goldman’s chief U.S. equity strategist David Kostin and colleagues wrote in a Feb. 20 report, citing the ratio of price to estimates of future profit and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization. “The only time during the past 40 years that the index traded at a higher multiple was during the 1997-2000 Tech Bubble.”...

Investors looking for more attractive valuations need to go outside the U.S., according to Kostin’s team, provided they use currency hedges. (That seems to be a popular trade du jour, given the surging popularity of the WisdomTree Europe Hedged Equity Fund.) Goldman is forecasting 12-month, local-currency returns of 19 percent for Japan’s Topix Index, 17 percent for the Stoxx Europe 600 Index, where central bank easing is about to heat up big time, and 15 percent for an index tracking Asian nations besides Japan.

WSJ on Foreign Stock Exposure

An interesting article including many good reasons for allocating to non US stocks. But a bit of performance chasing here. I wonder if the author would have written the same article during the period shown in the graph below included in the article.

Those that have consistently held international stocks are now benefiting as the performance chasers now find the arguments for holding foreign stocks persuasive and buy those stocks. The disciplined investors will be selling some of their international stocks to rebalance at some point while the performance chasers are still buying.

Four Reasons to Boost Your Foreign-Stock Exposure

Wednesday, February 18, 2015

More on Europe

An interesting chart from Bloomberg

 The Stoxx Europe 600 Index recorded a 10 percent gain through yesterday, while the Standard & Poor’s 500 Index only rose about 2 percent. The European indicator trailed the S&P 500 in four of the last five years.
Investors are focusing on the euro area, according to Michael Hartnett, Merrill’s chief investment strategist. Fifty-five percent of the respondents said the region carried more weight in their stock holdings than in their benchmarks. The proportion was the highest since May 2007.
Another article on the Euro hedged ETFs which I have written about numerous times appears in the WSJ moneybeat blog  today

Investors Piling in to Currency-Hedged ETFs

Investors are hedging their bets against more wild currency moves.
Nearly half of all inflows into U.S.-listed exchange-traded funds this year have been invested in currency-hedged products, according to A total of $10 billion has entered 35 currency-hedged funds in 2015, amounting to 49% of the $20.4 billion that all ETFs had gathered as of Friday, the firm said.
Such funds have been available for several years, but have become increasingly popular as of late as the U.S. dollar appreciates. In the first six weeks of 2015, the funds have collected nearly 30% of their total asset base.
Matt Hougan, president of analytics and publications at, expects currency-hedging to be a defining theme of 2015. It’s the number one topic of discussions at conferences and among advisers, he says.

Monday, February 16, 2015

German Stocks Hit an All Time High

Finally catching up to the US...and the performance chasers are joining in.And the valuation is still more than 20% below the US.

via bloomberg

(Bloomberg) -- German growth did the trick, sending the DAX Index inching above 11,000 for the first time.

A report showed Europe’s largest economy accelerated twice as fast as predicted in the latest event to propel German stocks 12 percent higher this year, while an exchange-traded fund tracking the nation’s shares drew record funds. Among developed markets, only Finland has performed better....
Germany, Russia’s biggest trade partner after China, was among nations suffering the most last year after Russia’s annexation of Crimea triggered European and U.S. sanctions. Investors pulled $1.1 billion from the iShares MSCI Germany ETF in 2014 amid concern the conflict with Russia will burden exporters.....

Friday, February 13, 2015

Lower Euro...Higher European Stocks

via Bloomberg

European stocks are rallying on speculation Mario Draghi’s policies will help improve economic growth, with a weaker euro boosting corporate profits.
The CHART OF THE DAY shows that the Euro Stoxx 50 Index and the region’s currency extended their moves in opposite directions, with the correlation between the two assets near an 11-year low. The equity gauge has rallied 8.6 percent this year as European Central Bank President Draghi announced a 1.1 trillion euro ($1.2 trillion) asset-purchase plan, pushing the euro down more than 5.5 percent.
Economists estimate the euro area will grow this year at the fastest pace since 2011, while export-reliant companies say they will benefit from the currency’s decline. Drugmaker Sanofi forecast the euro weakening may boost earnings as much as 5 percent. Carmaker Renault SA, which gets more than half of its sales from western Europe, jumped to a seven-year high after projecting higher deliveries and revenue in 2015.

As I have mentioned in several previous posts the growth of ETFs limked to the overall European and German stock market but hedged against a falling Euro allow one to profit from both of the trends in the graph below.

Here is a graph of HEWG the hedged Germany ETF and HEDJ the hedged Euro zone ETF
Below that is the Euro dollar exchange rate as can be seen the top chart matches the green line in the above chart and the lower chart the green line.

HEDJ currency hedged Europe (black) HEWG currency hedged Germany (brown)
US/Euro exchange rate

Thursday, February 12, 2015

Emerging Market Bonds No...Stocks Yes

I have written several times about the inadvisability of investing in emerging market bond funds. The yield pickup vs US $ bonds in my view doesn't offset the additional risk. Investing in emerging market bonds adds political and currency risk. Additionally, emerging market bond ETFs are concentrated in the emerging market countries with highest currency and country risk rather than a broad range of emerging market countries.
The strongest economies in the emerging markets are those countries that run current account surpluses and thus are not borrowers in the international bond market.So the countries with the strongest economies and equity markets are not accessed with bond ETFs. There is an additional disadvantage as well ,strong economic growth is often accompanied by higher interest rates/lower bond prices. So it is quite possible strong economic growth which would be good for stocks would be bad for bonds.

Bottom line.... if one is looking to gain exposure to emerging markets an investor is much better off holding an ETF of emerging market stocks vs bonds. This gives exposure to the strongest growing emerging market economies. The bond have similar currency risk and political risk as the equities but unlike the equities which have unlimited upside and downside potential the bonds have limited upside and unlimited downside potential (through default).

An example of the divergence between emerging markets stocks and bonds can be seen in recent developments.
From the WSJ

Emerging-Market Currencies Tumble as Worries Over Greece, Ukraine Escalate

Indonesia’s Rupiah Sinks as much as 1%, While South Africa’s Rand Hovers Close to Weakest in Over a Decade

Bond markets are also tumbling, sending yields surging and pointing to investors also pulling out of these markets. Yields move inversely to prices.
For investors, the weakness in Asia’s foreign-exchange markets, which have performed relatively well to their emerging market peers so far this year, is a surprise. As countries in Latin America and emerging Europe have grappled with domestic economic and political challenges, Asia has been resilient with signs of proactive new governments and central banks, and lower currency volatility.
Local currency bonds in Indonesia, Turkey, Thailand and the Philippines were top performers in 2014. Just weeks ago, yields on Indonesia’s bonds fell to multiyear lows as foreign investors poured into local government bond auctions.
But the currency’s sudden plunge Thursday had traders and dealers saying the central bank was intervening and had sold $50 million to $100 million.

The consequeences can be seen in year to date performance the broad emerging market stock ETF(ticker IEMG) ytd is +.9% while the local currency bond ETF (ticker EMLC) -3%

Growth of $100,00 IEMG(green) EMLC (blue)

The reason for the divergence as noted can be seen in the country allocation Below is the country allocation for IEMG the Emerging Market Stock ETF


















And Here is the allocation by country and currency of EMLC the local currency emerging market
by % 

Poland  10.28
South Africa 911
Malaysia 9.09
Brazil      8.65
Mexico  8.02
Turkey  7.97
Indonesia 7.00
Colombia 6.69
Thailand   6.52

Hungary   4.76
    • C

Here are the Expert Forecasts on the Future Price of Oil

via Bloomberg It would be even more interesting to check if a single one of these experts predicted the 50% decline in 6 months we saw in 2014

These Experts Know Exactly Where Oil Prices Are Headed

So what’s going to happen next? Here’s a sampling of predictions from the last two weeks:
  • Oil will probably continue to decline to as low as $30 a barrel, said Gary Cohn, president of Goldman Sachs Group Inc. “We’re probably in the lower, longer view,” said Cohn, a former oil trader.
  • Oil has the potential to reach $200 per barrel from a lack of investment in new supply, warned OPEC’s Secretary General Abdell El-Badri. “If you don’t invest in oil and gas, you will see more than $200,” he said, without giving a time frame.
  • Shale oil will soon be needed to make up for production declines around the world,pushing U.S. prices to as high as $65 a barrel, the head of Astenbeck Capital Management wrote in a Feb. 2 letter obtained by Bloomberg News.
  • In a Bloomberg News survey of analysts and traders, 12 of 32 respondents predicted futures will decline through Feb. 13, while 10 forecast an increase.
  • “We don’t think we’ve seen the bottom yet,” said Giovanni Staunovo, a commodities analyst at UBS in Zurich.
  • “We are establishing a bottom,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion. “In the long run, probably $60 is going to be your pivot point.” 
  • Oil could fall as low as $30 because supply surpluses won’t disappear overnight, said Barclays analyst Miswin Mahesh.
  • “The fundamental supply and demand does remind me of 1986 a bit, where we could go into a period in this decade of lower oil prices,” said BP CEO Bob Dudley. Prices may stay below $60 for as long as three years, he said. “It will be a long time before we see $100 again.”
  • Oil could fall to the $30 a barrel range, said Fumiya Kokubu, CEO of Tokyo-based Marubeni Corp. He said he doesn’t see much of a price rebound in the next two or three years.
  • The recent surge in oil prices is just a "head-fake," and oil as cheap as $20 a barrel may soon be on the way,  said Citigroup analyst Edward Morse. He sees afourth-quarter rebound to about $75
What’s an investor to think? In 2015, the average price is likely to be anywhere from $35 to $80, according to a Bloomberg Intelligence survey of 86 investment specialists. That’s a pretty big range.

Wednesday, February 11, 2015

Here We Go Again..."The Case for Active Management"....Not!

Hope springs eternal and the financial media and the Wall Street marketing machine always seem to come up with reasons why there are reasons to choose and actively managed mutual fund.

So the WSJ brought the latest version of this argument. Looking through the article one can see it boils down to "there are investment geniuses out there, you will be able to find them in advance and they will show great returns in the future". But I will go through parts of the article and give a more thorough critique,

 Furthermore if the author is looking to advisors as ts hose advocating active management one must ask the question "what exactly is the advisor doing ?". Ihe is simply running though past performance of active managers and choosing a portfolio made up of them ? If so he is using a methodology that has little if any chance of producing similar returns in the future. On the other hand a portfolio consisting of a mix of carefully selected ETFs can create a well diversified trasparent portfolio and in fact deal far better with some of the issues raised below than simply choosing a group of actively managed funds

Text from the article is in italics my comments in bold

There Are Still Some Scenarios Where the Hands-On Way Might Make More Sense

... many advisers still believe that at certain times, and for certain strategies, actively managed funds are superior to index funds. That is particularly true, they say, if the active fund has a good long-term track record and charges lower management fees than most of its peers.

Study after study has shown that past performance of active managers is a poor predictor of future performance. With management fees on many ETFs declining to virtually nothing…even a “low management fee” actively managed fund carries fees that are a multiple of the ETF fees. The Vanguard Total Stock Market ETF (ticker VTI) carries a management fee of .05%. Even a fund with an extremely low expense ratio of .50% (less than half the fees of the average actively managed fund) would be charging 10x the fee of the ETF.

Dividend Stocks

As yields have fallen, investors have flocked to dividend-paying stocks for income, and that has spurred rapid growth in dividend-focused ETFs. But to enhance their appeal, companies that sponsor such ETFs often design them with an easy-to-grasp mission—such as generating the highest yields or owning shares only of companies that consistently boost dividends.
Such ETFs often focus narrowly on certain sectors, such as economically sensitive or defensive stocks, ……says Todd Rosenbluth, director of ETF and mutual-fund research at S&P Capital IQ.., if market sentiment shifts away from the sector where an ETF is focused, that can hurt its overall performance. An active manager could limit the impact of such shifts by diversifying, Mr. Rosenbluth says

This is one of the “ you will find a genius active manager argument” one could easily argue that the active manager will make bad dexisions on shifting sectors. Furthermore there is much to question about the focus on dividends by investors both stock pickers, fund pickers and ETF investors. Many of these investors “searching for yield” have come to view dividend paying stocks as a substitute for bonds…they’re not.
2. If Markets Start Trading Sideways
Historically, active managers have lagged behind benchmarks during long, strong bull markets, when securities selection makes less of a difference. They tend to make up lost ground when markets level off or suffer corrections.
Could that signal better performance this year? The bull market may still have life left. But if stocks struggle and companies find earnings growth harder to come by, that is a climate that would favor active management, Mr. Reynolds says.
It seems at the beginning of every year we get the “this year will be a stockpickers market” prediction. First off I am not sure of the accuracy of the  assertion above particularly since correlation among stocks has increased. Also it is not clear how the data is constructed if the comparison is of the funds vs the S+P 500 it is not particularly valid since the S+P 500 is basically a large cap growth index so excludes value stocks large and small.
Additionally, even if the above argument were the case…how does one know in advance what the future direction of the market will be. The argument is a circular one..if you know the future direction of the market you will know when to move to an active manager…and of course you will pick the one that will outperform

3. When You Own Bonds
Bond yields move in the opposite direction of bond prices, so if rates are headed higher this year, it could be risky to own an ETF that closely tracks a broad bond index. Some types of bonds would be particularly hurt, including Treasurys and certain mortgage-backed securities.
One widely held bond ETF, iShares U.S. Core Aggregate Bond (AGG), has more than half of its portfolio in such rate-sensitive securities. …Moreover, such ETFs can’t change their portfolios to reflect concerns about rising rates, because they are obligated to replicate the performance of an index as closely as possible by owning securities in the index.

The above statement is correct but is not one of the negatives of bond ETFs but rather a positive. Since the ETFs have total transparency it is possible to build a bond allocation with ETFs and know exactly what one owns. There is no obligation to own only the total bond index (AGG) an investor could easily reduce the risk associated with rising rates by moving to short term bond ETFs. A good advisor should be able to reduce the interest rate risk in a bond portfolio through use of a mix of bond ETFs
Then we get the following argument for active bond management
 As a result, at times when rates might be headed higher, such as now, investors may be better off in an active fund with the flexibility to reduce interest-rate sensitivity….
Flexible funds also can reduce overall rate sensitivity through a range of derivatives transactions. And they can build cash positions and move to the sidelines when certain market sectors grow expensive, she adds.
“This is a time when active management can really show its value,” Ms. McDonough says.
Last year’s major event in the world of bond mutual funds with the fall of “bond king” Bill Gross and his Pimco Total Return bond fund showed exactly how such active management can produce dismal results and additional risk. Such managers take big risks based on their judgement of future bond market developments…sometimes they are right and sometimes they are wrong but the investor doesn’t even know in real time how the fund is positioned. Once again investor has taken a bet on a genius manager not a transparent bond strategy that could be easily implemented with low cost ETFs. Gross has moved on to another firm, assets have flowed massively out of  Pimco Total Return once the largest mutual fund in the world. There is a new hot “genius” fund manger whose fund has generated massive inflows and has so far had great success profiting from his bold bets on the bond market…how long that will last is of course impossible to know.

When Investing Abroad
ETFs make it easy to get non-U.S. exposure. But those based on market-cap-weighted indexes tilt toward the largest foreign markets, sometimes exposing investors to weaker economies, including, for now, Russia and Western Europe.
Actively managed international funds can fare better at diversifying away from indexes, says Jon Hale, director of manager research, North America, at Morningstar. For example, he says, they can boost returns by buying stocks in faster-growing emerging-markets nations that aren’t included in certain widely used foreign-stock benchmarks, such as the MSCI EAFE Index.

Part of the argument above makes absolutely no sense of course emerging markets aren’t include in the EAFE’s a developed international index. Those looking to add emerging markets exposure to their portfolio would make their international holding a mix of low cost developed and emerging markets ETFs,
Choosing an active manger in emerging markets means picking a manager that will make the correct decisions as to country and individual stock selection…a tough task to achieve consistently. Even the article here shows how difficult the task is. The author lumps together Europe and Russia as “weak performing economies” by which I assume he means poor performing equity markets as well. Ironically the European stock ETF VGK has outperformed the S+P 500 this year 3.1$ vs. .6%,

Furthermore an advisor can easily make use of the vast number of ETFs to allocate a portfolio not only between developed and emerging markets but to specific companies or regions...and even hedge out currency risk. I have written previously of the case for overweighing Asian Emerging markets vs other countries in the emerging market category and of hedging the risk of a weaker Euro through currency hedged ETFs. Not only is this easily done it can be done in a fully transparent manner..unlike an active manager whose holdings are not available in real time.

5. If You’re Worried About Volatility
Limiting losses can help in building a nest egg. And some ETFs aim to provide downside cushion by focusing on lower-volatility stocks. ….But active managers have more ways to play defense, …They can own higher-quality stocks and trim positions as valuations rise. “They don’t have the pedal to the metal when the markets are going up, and they put the brake on more quickly when markets are going down,” says Mr. Clift.

Another one of the “there are geniuses and you will find them argument”. While low/minimum volatility ETFs have a short tracke record they are based on a methodology which can be back tested rigorously over decades…unlike an active fund managers strategy and of course few if any fund managers have performance data going back decades.
Most importantly…if you are worried about volatility…you should own less stocks and more short term bonds.

If this article shows anything about use of actively managed funds it is how weak the case for using them is Either by choosing a small number of broad assset class funds or using a mix of ETFs to target particular sectors of the bond and global equity markets the case for using the ETFs and passing on the actively managed funds is a very strong one.