Plungerhead. Gnarly Head. Three Blind Moose. Cat's Pee on a Gooseberry Bush. Purple Cowboy. Sledgehammer. No these are not the names of "art films" or punk rock bands.

These are names of wines that you can find in the grocery store! (A glass of Orin Swift’s red blend classic “Machete” is show above).

If you are not a hardcore wine aficionado, you may not realize how your local grocery wine aisle has evolved over the last 15 years thanks to the marketing team at Casella Wines. Prior to 2000, wine retailers offered buyers aisles of wine varieties, but to the general consumer the choice could be overwhelming and intimidating. The names and labels appeared boring and complicated with enological terminology about factors that only dedicated readers of Wine Spectator understood, such as texture, complexity, barrel oak type and tannin levels. Profiled in the book Blue Ocean Strategy - How to Create Uncontested Market Space & Make the Competition Irrevelant, Casella, an Australian winemaker, introduced its Yellow Tail brand in 2000 and opened up the door to mass accessibility and massive new demand for wine by keeping it simple. The bottles display no technical lingo and instead have striking, simplistic labels. The brand’s appeal has made it one of the fastest-growing brands in Australia as well as the U.S.

After Casella's success, the rest of the wine industry pivoted its go-to-market strategy by making the name and bottle label more interesting while simplifying the wine buying experience to create new demand.

There has been a similar revolution going on in the investment industry.

Investor use of Exchange Traded Funds, better known as ETFs, has been growing substantially over the last 10 years, taking market share from traditional active mutual funds. An ETF is a marketable security that tracks a "basket" of assets, e.g., stocks, similar to a passive mutual fund (read Investopedia's ETF primer here). ETFs can be attractive alternatives to traditional mutual funds because they can be bought and sold during the trading day like a common stock, and they tend to have lower expense ratios compared to actively managed mutual funds due to their simple passive construction. Another advantage for individual investors is tax efficiency. Unlike mutual funds, realized capital gains from sales inside the ETF are not passed through to the owners of ETFs as they are with mutual funds.

While there are active investment managers that have persistently outperformed index benchmarks over long periods of time (we employ some of them), it is not always possible. It is rare for an active manager to outperform in every time period measured, but there are many that persist. The struggle is real according to the popular S&P Dow Jones Indices SPIVA study for 2015, which shows the majority of active managers underperform. It is easy to see why ETFs have been taking market share from traditional actively managed mutual funds. According to Morningstar Manager Research, in 2015 alone there were net inflows of $413 billion into passive investment strategies, with ETFs capturing the vast majority vs. net outflows of $207 billion from active investment strategies:

Perhaps one of the appeals of ETFs is their simplicity. They tend to deliver nothing more or less than benchmark index performance (gross of fees).

Passive index ETFs may forego the chance of outperformance (and underperformance!) to hopefully deliver benchmark index returns. When constructing portfolios that attempt to deliver returns that meet long-term financial planning goals, investors can be rewarded over the long term by bypassing the risk of outsized underperformance from active management in favor of returns in line with the index benchmarks.

 Sometimes simple tools can be the best tool to get the job done, just as simple wine can be the best wine to get the job done!


This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  The opinions expressed do not necessarily reflect those of author and are subject to change without notice. Past performance is not indicative of future results. Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Reference to an index does not imply that a portfolio will achieve return, volatility, or other results similar to an index. Performance of an index is not illustrative of any account, portfolio or strategy managed by Sequoia Financial Group. It is not possible to invest directly in an index.