Motley Fool ETF Debuts (TMFC)

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Pax
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Motley Fool ETF Debuts (TMFC)

Post by Pax » Fri Feb 02, 2018 10:54 am

Motley Fool ETF Debuts

I was a big fan of the "Fool" and I even have couple of their books. Check this out:

http://www.etf.com/sections/daily-etf-w ... nopaging=1

Regards

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cinghiale
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Re: Motley Fool ETF Debuts (TMFC)

Post by cinghiale » Fri Feb 02, 2018 12:03 pm

Note the word “index” in the title of the ETF.

They have obviously done their homework on how to best market this new offering.

This isn’t an index.
But index funds are hauling in impressive and increasing percentages of new money with each new month.
“Hey, let’s call it an index...”
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nisiprius
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Re: Motley Fool ETF Debuts (TMFC)

Post by nisiprius » Fri Feb 02, 2018 12:06 pm

0.50% expense ratio? For an ETF in the U.S. "large blend" category?
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david1082b
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Re: Motley Fool ETF Debuts (TMFC)

Post by david1082b » Fri Feb 02, 2018 9:20 pm

I'm struggling to understand how they arrived at the backtested performance for this particular 100- stock index:
a 100-stock index that consists of companies that have been recommended by The Motley Fool website or its analysts.

Components of the index must either be recommended as “buy” by the Motley Fool website or its associated publications, or they must be included as one of the top 150 stocks in the company’s “Fool IQ” database of companies and their associated analyst opinions

The backtested index has returned 204.76% since inception (data goes back to 2007) relative to a 138.4% return for the S&P 500 during the same time period. Plus, the Fool 100 has outperformed the S&P 500 in eight of the last 11 years, according to the backtested data.
What is the backtested performance based on? The current 100 stocks in the index? Surely there would be loads of stocks that have been given a "buy" recommendation at Motley Fool. How many stocks have been in the "top 150" in the "Fool IQ" database? Did they simply pick ones that outperformed a lot in the last 10 years thus giving this ETF a backtested edge over the S&P 500 by default?
“Really, one of the things that helps explains why [outperformance versus S&P 500] might be the case is the types of businesses that the Motley Fool tends to recommend for purchase,” said Hinmon. “It really focuses on quality businesses, and it focuses on some of the qualitative aspects of business such as management and culture. The Motley Fool believes that, over time, those qualitative factors really matter when it comes to outperformance.”
What about Motley Fool portfolios that didn't do so well? Doesn't MF have loads of portfolios that underperformed, which can then be safely ignored while they promote the ones that happened to outperform over a recent stretch of time? It looks like survivorship bias more than anything.

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arcticpineapplecorp.
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Re: Motley Fool ETF Debuts (TMFC)

Post by arcticpineapplecorp. » Fri Feb 02, 2018 9:59 pm

Pax, have you checked out the actual filing? You can read it here:

https://www.sec.gov/Archives/edgar/data ... 85bpos.htm

This is certainly concerning:
Portfolio Turnover Risk. In seeking to replicate the Index, which is adjusted and rebalanced quarterly, the Fund may incur relatively high portfolio turnover. High portfolio turnover may result in increased transaction costs and may lower Fund performance.
How does a fund that has high turnover suddenly qualify as an "index"???
There can be no guarantee that the Fund will achieve a high degree of correlation with the Index.
How's that sound?
Registered Investment Company (“RIC”) Compliance Risk. The Fund has elected to be, and intends to qualify each year for treatment as, a RIC under the Internal Revenue Code of 1986, as amended. To maintain the Fund’s qualification for federal income tax treatment as a RIC, the Fund must meet certain source-of-income, asset diversification and annual distribution requirements. If for any taxable year the Fund fails to qualify for the special federal income tax treatment afforded to RICs, all of the Fund’s taxable income will be subject to federal income tax at regular corporate rates (without any deduction for distributions to its shareholders) and its income available for distribution will be reduced. Under certain circumstances, the Fund could cure a failure to qualify as a RIC, but in order to do so, the Fund could incur significant Fund-level taxes and could be forced to dispose of certain assets.
Authorized Participants (“APs”), Market Makers, and Liquidity Providers Concentration Risk. The Fund may have a limited number of financial institutions that may act as APs. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, shares may trade at a material discount to NAV and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
Frequent Purchases and Redemptions of Shares

The Fund imposes no restrictions on the frequency of purchases and redemptions of shares
. In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by Fund shareholders. Purchases and redemptions by APs, who are the only parties that may purchase or redeem shares directly with the Funds, are an essential part of the ETF process and help keep share trading prices in line with NAV. As such, the Fund accommodates frequent purchases and redemptions by APs. However, the Board has also determined that frequent purchases and redemptions for cash may increase tracking error and portfolio transaction costs and may lead to the realization of capital gains. To minimize these potential consequences of frequent purchases and redemptions, the Fund employs fair value pricing and imposes transaction fees on purchases and redemptions of Creation Units to cover the custodial and other costs incurred by the Funds in effecting trades. In addition, the Fund reserves the right to reject any purchase order at any time.
Dividends and Distributions

The Fund intends to pay out dividends, if any, and distribute any net realized capital gains to its shareholders at least annually.
You want to have capital gains forced on you instead of deciding when to incur capital gains yourself? Didn't think so.
Non-Investment-Grade Debt Securities

As discussed in the Prospectus, the Fund may invest in both investment-grade and non-investment-grade debt securities (including high-yield bonds). Non-investment-grade debt securities (typically called “junk bonds”) are securities considered to be predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal.

Companies that issue these securities often are highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-grade securities. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of these securities may not have sufficient revenues to meet their interest payment obligations. The issuer’s ability to service its debt obligations also may be affected adversely by specific corporate developments, forecasts, or the unavailability of additional financing. The risk of loss because of default by the issuer is significantly greater for the holders of these securities, because such securities generally are unsecured and often are subordinated to other creditors of the issuer.
You want junk bonds in your "index"? Didn't think so.
The Fund may acquire these securities during an initial offering. Such securities may involve special risks because they are new issues. The Fund has no arrangement with any person concerning the acquisition of such securities, and the Adviser will review the credit and other characteristics pertinent to such new issues.
Hmmm....wasn't it the Fools who always said IPOs generally make for bad investments? Sounds like they changed their tune on that one. I love how they admit IPOs have special risks, but that won't stop them from putting them in your fund.
Illiquid Securities

The Fund may invest up to 15% of the value of its net assets in illiquid securities. Illiquid securities are securities that the Fund cannot sell or dispose of in the ordinary course of business within seven days at approximately the value at which the Fund carries the securities.
Temporary Investments

During periods of adverse market or economic conditions, the Fund may temporarily invest all or a substantial portion of their assets in high-quality, fixed-income securities, money market instruments, and shares of money market mutual funds, or it may hold cash. At such times, the Fund would not be pursuing their stated investment objective with its usual investment strategies.
That's funny. So they're saying they're gonna what, sell a substantial portion of their investments to hold cash...AFTER the market crashes??? That's the worse thing I've ever read in a prospectus. They won't know about adverse market/economic conditions until AFTER it's already been known. By then, it'll be too late. They will need to go to cash BEFORE the adverse market/economic conditions begin. But if they haven't occurred, how would they know it's going to happen???
Portfolio Turnover

Although the Fund generally does not engage in short-term trading, portfolio securities may be sold without regard to the time they have been held when investment considerations warrant such action. It is expected that the Fund’s portfolio turnover rate will not exceed 100%.
That's nice. Thanks for limiting the amount of turnover to just the entire portfolio each year.

It further says:
PROSPECTUS
dated January 22, 2018

Motley Fool 100 Index ETF

(Cboe BZX: TMFC)

A series of The RBB Fund, Inc.
What's the RBB fund?

http://www.rbbfund.com/

This might explain why the expense ratio is so high...
FUND EXPENSES INCLUDE:

Investment advisory Fees – including waivers / reimbursements.
Distribution and Shareholder service fees (12b-1) optional.
Fund specific and shared expenses (details will be provided).
Net expense – paid by fund
source: http://www.rbbfund.com/fund-expense-overview
The Fools are passing on THEIR costs to the ETF buyers. Don't be a Fool. Buy more diversified and cheaper and real index funds.

That's about all I got. Read the fine print folks.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

venkman
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Re: Motley Fool ETF Debuts (TMFC)

Post by venkman » Fri Feb 02, 2018 10:10 pm

david1082b wrote:
Fri Feb 02, 2018 9:20 pm
What is the backtested performance based on? The current 100 stocks in the index?
Did they simply pick ones that outperformed a lot in the last 10 years thus giving this ETF a backtested edge over the S&P 500 by default?
Morningstar lists it as 53% large growth and 40% technology. So, I'd say your theory is a good guess.

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grabiner
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Re: Motley Fool ETF Debuts (TMFC)

Post by grabiner » Fri Feb 02, 2018 10:55 pm

arcticpineapplecorp. wrote:
Fri Feb 02, 2018 9:59 pm
Pax, have you checked out the actual filing? You can read it here:

https://www.sec.gov/Archives/edgar/data ... 85bpos.htm

This is certainly concerning:
Much of this is regulatory boilerplate; you need to distinguish the things which actually matter.

Portfolio Turnover Risk. In seeking to replicate the Index, which is adjusted and rebalanced quarterly, the Fund may incur relatively high portfolio turnover. High portfolio turnover may result in increased transaction costs and may lower Fund performance.
There are high-turnover indexes, but this is likely to be undesirable.
There can be no guarantee that the Fund will achieve a high degree of correlation with the Index.

Registered Investment Company (“RIC”) Compliance Risk.

Authorized Participants (“APs”), Market Makers, and Liquidity Providers Concentration Risk.
These are boilerplate clauses. No index fund guarantees that it will track its index, and every mutual fund is structured as an RIC but the clause protects it against legal liability if its structure is found defective.
Frequent Purchases and Redemptions of Shares
In addition, the Fund reserves the right to reject any purchase order at any time.
You'll find this as well. More often, funds reserve the right to reject disruptive oders.
Dividends and Distributions

The Fund intends to pay out dividends, if any, and distribute any net realized capital gains to its shareholders at least annually.
This is standard. Any fund which realizes capital gains must distribute them; you'll see the same clause even in a fund such as Vanguard Tax-Managed Capital Appreciation which intends never to distribute any.
Non-Investment-Grade Debt Securities
Here, the problem is whether you want these in your fund.
Illiquid Securities

Temporary Investments
Again, these are boilerplate. Funds reserve the right to deviate from their investment strategy, whether they intend to do so or not.
Portfolio Turnover

Although the Fund generally does not engage in short-term trading, portfolio securities may be sold without regard to the time they have been held when investment considerations warrant such action. It is expected that the Fund’s portfolio turnover rate will not exceed 100%.
And this gets back to what is wrong with the fund. An index which turns over rapidly will incur trading costs, and large tax costs in a taxable account.
Wiki David Grabiner

Pax
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Re: Motley Fool ETF Debuts (TMFC)

Post by Pax » Sat Feb 03, 2018 12:53 pm

Thanks! .. re-reading the small print. The devil is in the details!

amphora
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Re: Motley Fool ETF Debuts (TMFC)

Post by amphora » Sat Feb 03, 2018 1:12 pm

I enjoyed reading the Motley Fool when I was younger. The books and website offer a fun introduction to investing though it's certainly not the BH approach.

It's great that they're putting their money where their mouth is and launching an ETF. It's certainly not an index fund and I'm skeptical of their backdated hypothetical performance, but now at least it will be easy to see if their stock picks are any good.

lack_ey
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Re: Motley Fool ETF Debuts (TMFC)

Post by lack_ey » Sat Feb 03, 2018 1:52 pm

cinghiale wrote:
Fri Feb 02, 2018 12:03 pm
Note the word “index” in the title of the ETF.

They have obviously done their homework on how to best market this new offering.

This isn’t an index.
But index funds are hauling in impressive and increasing percentages of new money with each new month.
“Hey, let’s call it an index...”
If a fund follows an index, it's trivially and definitionally an index fund, whatever the index is and whether you approve of it or not. This provides a natural fund benchmark and some extra layer of transparency.

The index here is even cap weighted. A lot of the smart beta and other "strategy" type indexes are not necessarily.

But clearly and more importantly, the fund investing strategy is discretionary active stock picking based on Motley Fool recommendations, with some rules for stock selection, weighting, and portfolio maintenance.


nisiprius wrote:
Fri Feb 02, 2018 12:06 pm
0.50% expense ratio? For an ETF in the U.S. "large blend" category?
Well, it is an active strategy, and most U.S. large blend active funds are more expensive than that.

To me the bigger issue is that Motley Fool recommendations are mostly already out in the public domain; this is just a convenience fee for the wrapper. That said, I guess a lot of the picks are behind a paywall, so you could pay for this ETF rather than the service.

...but wait, now all you have to do is watch the ETF or the index to see their picks.

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Watty
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Re: Motley Fool ETF Debuts (TMFC)

Post by Watty » Sat Feb 03, 2018 2:19 pm

As I recall they tried doing a mutual fund years agos but they shut it down when it did badly.

I used to follow them but after the dot com crash it was pretty clear that their stragaties like the Dogs of the Dow, Foolish four, and Rulebreakers really did not work. There also seemed to be a lot of survivorship bias since they would come up with new portfolios frequentely and the ones that did not work would be discontinued.

On of the ironies of the way they are today is that the "fool" name came from their premis that a fool could follow simple strategies or index fund that would beat the "wise" mutual fund managers.

My impression was that after the dot com crash that that add revenue declined so to survive they had to start selling subscriptions and basicaly became like the "wise" that they had previousely mocked.

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CABob
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Re: Motley Fool ETF Debuts (TMFC)

Post by CABob » Sat Feb 03, 2018 2:39 pm

Watty wrote:
Sat Feb 03, 2018 2:19 pm
As I recall they tried doing a mutual fund years agos but they shut it down when it did badly.
I believe that there are still some Motley Fool Funds.
I also have and do follow some of the Motley Fool message boards but take a pass on their subscription services and mutual funds and will likewise take a pass on their ETF even with "index" in its title.
They do a regular thing on April 1 as an April Fools joke and I was wondering if this was it except a couple of months early.
Bob

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