In the late 1990s, wealth manager Tom Lydon got fed up with mutual funds. Lydon, the president of Global Trends Investments in Newport Beach, Calif., had long adhered to the investment discipline of tactical trend following, a strategy that assumes trends don't continue on the upside forever. But his strategy had become harder to follow in the mutual fund space, with its constant closings, restrictions on trades, redemption fees, and style drift.
So when the tech bubble burst at the end of the last decade, he was ready to make a change. "Since 2003, we've shifted from 90% mutual funds to 90% ETFs, which is where we still are today," he says.
Lydon is a 25-year veteran of the financial services industry, having gotten his start at Fidelity Investments' institutional division before starting Global Trends Investments in 1996. Perhaps of greater impact was the time he spent with Dick Fabian. Some readers will remember Fabian and his Telephone Switch Newsletter, as it was called in the '80s. Lydon, after his stint with Boston-based Fidelity, moved to California and helped Fabian build his management business, and what he learned was the whole discipline of trend following. As a disciple of this approach, Lydon began incorporating moving averages into his current investment strategy.
But gradually, he found the mutual fund world becoming ill-suited to the kind of investing he wanted to do. In the late '90s, some of the best-performing midcap, small-cap and international funds either stopped accepting new assets or began to impose high redemption fees, which made his tactical investing considerably more difficult. The rules set by these funds and the custodian marketplaces where they were sold didn't work for all advisors' investment styles.
"For decades there's been a love/hate relationship between advisors and mutual funds," says Lydon, "as the funds insist advisors hold their shares for extended periods of time."
In a 2007 study by the federal government's Thrift Savings Plan, large mutual fund companies were found to control too-frequent trading by either assessing additional fees for redemptions or by restricting trading-for example, by allowing no more than one purchase and sale of a fund within a specified time period.
At the same time Lydon was discovering he could no longer use certain mutual fund managers, he was becoming more aware of ETFs. "With ETFs, there are no rules since the securities are traded on the exchanges. We can buy and sell them in the same day [without penalty] if we want to," he says.
Still, the move from funds to ETFs poses challenges of its own. "Like many advisors, we were custodying with Schwab in the late '90s and early 2000s," says Lydon. "When the market declined during 2000-2002, we were mostly in cash and beginning to notice ETFs. Although there weren't the number of ETF choices back then that we have today, there were a decent number of domestic asset class choices, and the pricing process through Schwab worked well. Our challenge was educating clients about the benefits of ETFs, but once clients understood those benefits-including ETFs' low costs-they trusted that we were doing the right thing."
So enamored was Lydon with the ease and convenience of ETF investing, he started his own ETF Web site: www.etftrends.com. "As time went on and more and more ETFs became available and were working well for our clients, we realized there wasn't one place you could go to get information about ETF providers and product development efforts. We saw other advisors going through the same search. So in 2005, we threw together a blog about ETFs. We let our fellow advisors know and encouraged them to share stories they could upload about their experience with ETFs. The blog became a Web site, and the site became helpful for our clients, too. Rather than educating them one-on-one about ETFs, we could direct them to www.etftrends.com instead."
The ETF site eventually evolved into much more, though. As Lydon and his followers added more stories to it, major search engines began noticing. "If we added two stories a day, we'd get twice the traffic; four stories and it doubled again. That's when I realized how much of a demand there was for education on ETFs. Initially, I was just creating an educational tool for clients who would refer their friends to the site and to Global, but we found the site was a great tool for other advisors, too. I didn't think about the fact that we'd get good PR from it. Now I get calls from print, TV and radio media looking for ETF commentary."