CONTRIBUTORS
David Mann
Global Head of ETF Product and Capital Markets
Franklin Templeton
I think this might be the year for the Detroit Lions. Last year, they won more playoff games (two) than in the previous 70 years combined (one victory). That is not a typo. Hope can be a dangerous thing, but I am all in on this team winning the Super Bowl. And one of the best gauges of a team’s talent is how well their top offensive players get drafted in fantasy football. This year, there are currently two Detroit Lions who, on average, are first round selections—madness!
My son is now up to five different fantasy football leagues and, as he loves to tell my wife, a successful fantasy draft usually does not include the players she actually knows. She no longer asks if he got Patrick Mahomes because she’s learned that despite the quarterback being possibly the NFL’s best asset, he is a third-round player in fantasy football circles. [Editor’s note: David and his son drafted Mahomes in the fourth round of their father/son league]
Now, I don’t want to spend too much time diving into fantasy football drafting strategies but would like to reiterate that the goal is to score the most possible points each week. Picking the right players is only part of the battle as positional scarcity and the rules of the league are often just as important. As crazy as it sounds, if there were a kicker who everyone knew would kick six field goals every game, that player would most likely be the top pick in the draft because of how much relative value that is compared to an average kicker who maybe makes two field goals per game.
In reviewing our exchange-traded fund (ETF) lineup with potential investors during a recent roadshow, I was asked a very open-ended question about which ETFs I would highlight among our passive, smart beta and active offerings. Typically, clients are focused on just one or two ETFs, so I was kind of excited to talk through the merits of all our strategies. As I was going through our options across active and passive, I could not help but squint and see a few parallels with how I approach my fantasy football drafts. Time to have a little fun.
Quarterbacks
I usually wait until later rounds to draft a quarterback (or for those who prefer auction drafts, I spend under $5 for that position). As I mentioned earlier, there is a reason Mahomes is often drafted in the third round. I equate the quarterback position in fantasy football to market-capitalization weighted, passive ETFs where often there are multiple options that provide very similar exposure to the same underlying asset class. For these passive ETFs, choosing the lowest-cost option makes the most sense.
Running backs
Even though I feel that in recent years fewer running backs are drafted in the first round, I almost always select a running back with my first pick (or at worst, my second pick). My rationale is quite simple in that there are only 32 starting running backs, and many of those starters are part of the dreaded running back by committee. I want a standout that either gets a ton of carries or is frequently targeted in the passing game. I equate this to active ETFs where investors want the portfolio manager to provide a specific outcome (risk-adjusted returns, alpha, income, etc.) and are willing to pay a higher price for it.
Wide receivers/tight ends
The NFL is going through a bit of an offensive boom, with more teams focusing on the passing game over establishing the run. Many teams routinely run offensive plays with three wide receivers and a tight end in formation. Given the importance of catching passes, careful analysis is needed to understand the rules of the league (are there points per reception?) and the philosophy of the team (short passes or bombs away). I equate this position to smart beta ETFs where investors want the ETF to track an index but are open to the idea of a different set of rules to achieve a specific outcome.
Kickers/defense
These should be your last two picks of the draft, and I am not even going to attempt an ETF analogy.
In summary, just like a solid fantasy football lineup needs careful analysis across all positions, I believe a successful ETF portfolio should also be a thoughtful blend of active, smart beta, and passive strategies designed for a specific objective. Go Lions!
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.