Around the ETF World in 80 Hours
A few weeks ago I had the privilege of spending a solid three and a half days at the Inside ETFs conference, or as Eric Balchunas from Bloomberg points out – what you get “when you cross Comi-Con, the Catalina Wine Mixer and low-cost passive investing.”
Given the explosive growth of ETFs, it’s hard to believe that the industry itself only 25 years old! In honor of the silver anniversary of ETFs, I wanted to share 25 takeaways from immersing myself in all things ETF for roughly 80 hours. Think of it as part conference recap, part observations of industry trends.
1. State of the ETF Industry
One of the highlights of every Inside ETFs conference is the annual “State of the Union” from Matt Hougan and Dave Nadig, the ETF industry’s favorite Odd Couple.
- There were $477B of inflows to ETFs in 2017. That’s 2X more than any previous year and more than mutual funds have ever taken in in a single year.
- Industry AUM is at $3.2 TRILLION.
- They believe that indexing has become the new face of ESG (Environmental, Social and Governance) investing.
- Hedge Funds may be the “next frontier” for ETF disruption.
- ETF AUM is on pace to exceed mutual fund AUM by 2025
2. The Role of Technology in the Evolution of the Financial Advisor
Michael Kitces kicked things off on Sunday (yes, Sunday) with a fantastic presentation about the evolution of investment advice over the past few decades and how technological advances have played a key role in these shifts.
The five trends that Michael covered were:
- Technology: The internet shrunk the travel agent industry by 45 percent, but those that remained saw an increase in productivity of 300 percent. Two times as many people use travel agents today than before the internet showed up. Technology is not a choice, it’s a necessity – and an opportunity.
- The great convergence: The future is fiduciary and it’s global. No longer will it be sufficient for RIAs use the fiduciary standard as a way to stand out relative to competitors (i.e. wirehouses)
- Differentiation: Michael referenced an advisor that exclusively works with bass fishermen. Not fishermen, BASS fishermen.
- The search for new models: Millennials are more willing to pay for advice than Boomers, but many aren’t served by the traditional AUM based model. They also care less about the geographical location of their advisor – they just want to find someone that can solve their problems. Michael wasn’t necessarily negative on the AUM model, other than that everybody does it.
- The client experience: Per Michael, today’s client experience can be described as a combination of couples therapy, a math class and a dental exam. The catalyst for each advisor evolution is generational change. Advisors need to adapt the client experience for the “digital native” generation that is currently accumulating (and will soon be inheriting) a massive amount of wealth. Excellent experiences are also standardized – think Starbucks. Though counterintuitive, standardization is actually how you allow for personalization for clients!
3. Capitalizing on Disruption
There’s a new sheriff in Valley Forge, PA and his name is Tim Buckley. The new Vanguard CEO delivered the opening keynote, “Capitalizing on Disruption.” In it, Tim spoke of three flawed assumptions as it relates to the impact of automation:
- Flawed Assumption #1: Each job only has one task
- Flawed Assumption #2: The underlying tasks of jobs don’t change
- Flawed Assumption #3: Technology acts only as a substitute for human labor
Buckley emphasized that while technology can do repetitive tasks, it will likely never replace uniquely human behaviors such as creativity, flexibility and empathy. Advisors need to let machines take care of what they can do more efficiently and refocus efforts towards behavioral coaching and designing custom solutions for clients. In other words, move higher up the “Advisor Alpha” value stack.
4. Silver SPY
This year’s conference coincided with the 25th anniversary of the launch of the very first exchange-traded fund, State Street’s SPDR S&P 500 ETF, or ‘SPY’. Not only is SPY the O.G. of ETFs, it’s also the largest U.S. exchange traded product – currently hovering around $270 $260 $250 Billion in assets. Jim Ross, Chairman of State Street’s global SPDR business, was not the mastermind behind SPY’s creation but was an employee there during the time the fund launched. When asked by the Wall Street Journal whether anyone could have predicted how ETFs would change the investing landscape, he responded “No one had the vision of this.”
5. Sizzle vs. Steak
One of the most entertaining sessions of the conference was the “Best New ETF of 2017” panel, with the following panelists:
Each panelist was given 90 seconds to make their pitch to the audience, with someone else assigned to provide the rebuttal. The winner was determined by audience noise.
Matt Hougan ended up taking home the honors this year. His selection? The USCF SummerHaven Private Equity Strategy ETF. Other nominees included an actively managed global equity ETF, a broad based developed markets international equity ETF, a few different flavors of corporate bonds ETFs and a tactical US equity strategy.
I don’t want to knock the winning fund – which has just $2M in AUM – but I think it was Matt’s showmanship skills that won the prize as opposed to the merits of the fund itself. If I were to bet my money, I’d wager that the cheap, boring nominees end up being the big winners from a flows perspective.
Sizzle may have won the day, but steak is where the substance is.
6. Ten Questions for WisdomTree CEO Jono Steinberg
- Could you build WisdomTree again in today’s environment? “No, I could not do it again today.”
- Growth of DXJ – blessing or curse? “Unquestionably a blessing”
- Key to “best place to work” culture? “Hire happy people”
- Is there a bubble in indexing? “No, as there are too many active strategies being applied systematically for that to be true.”
- Is there a bubble in dividend stocks? “While dividend strategies have certainly collected a lot of interest and assets, not all dividend portfolios are created equally.”
- Will active ever rebound? “No one is going back from smartphones to payphones.”
- Will another technology disrupt ETFs? “Unequivocally no”
7. There’s a Quincy Jones ETF Coming Soon…No, Seriously
Legendary music producer Quincy Jones is lending his name to an index created by a firm called “Iconic Beta” focused on streaming music, media, and entertainment.
Sure it’s a gimmick, but at least it got us a Q&A with Quincy himself! He told some great stories, but unfortunately he didn’t share ANY of the ones he gave in this interview with Vulture. Read it if you haven’t already – it’s bonkers.
8. From Trading Vehicles to Buy and Hold
One of the more fascinating developments over the last few years has been investors’ adoption of ETFs as “buy and hold” vehicles, as opposed to the trading instruments they were originally intended to be.
Don’t get me wrong, there are still a TON of hedge funds, strategists and day-traders that actively move in and out of ETFs due to their intraday liquidity. That said, it is remarkable that while the total amount of assets in ETFs has exploded over the last decade, the moving average of trading volume has essentially flat-lined since the Financial Crisis.
9. A Rose by Any Other Name…
We now have blockchain ETFs! Only the SEC won’t allow sponsors to actually call them blockchain ETFs. So instead we get:
- Amplify Transformational Data Sharing ETF (Ticker: BLOK)
- Reality Shares Nasdaq NexGen Economy ETF (Ticker: BLCN)
- First Trust Indxx Innovative Transaction & Process ETF (Ticker: LEGR)
- Innovation Shares NextGen Protocol ETF (Ticker: KOIN)
Oh, and lest you think you’re buying “pure play” exposure to blockchain technology companies with these funds, take a look under the hood first. Or as Josh Brown put it:
While we’re on the topic, there’s a marijuana ETF now too. But again, they can’t call it that so instead we get:
- ETFMG Alternative Harvest ETF (Ticker: MJ)
Oh well, at least the tickers give a little wink wink nudge nudge…
10. Gender Diversity
I’ve been to my fair share of investment conferences over the years, and let’s just say the line for the men’s room is typically quite a bit longer than that of the ladies’ room. It’s no secret that the finance industry as a whole could stand to benefit from more gender diversity. That said, I was encouraged by what I observed at this year’s Inside ETFs conference. From speakers to attendees, there seemed to be more balance between females and males than I recall seeing at any other industry event. A shining example of the growing presence of women in investing was the annual Women in ETFs breakfast that had over 300 attendees.
11. Hedge Funds – the Next Frontier?
The image above from Bloomberg is staggering. Hedge Funds rake in $36 Billion in revenue for every $2 Trillion in assets, while ETFs only take in $4.8 Billion for the same. Jeff Bezos is fond of saying “your margin is my opportunity.” Well, Hedge Fund margins may be ETFs opportunity. There are a number of interesting, yet relatively new, “liquid alternative” strategies from firms like WisdomTree, J.P. Morgan and others that aim to deliver the “beta” of Hedge Fund return streams at a fraction of the cost. It remains to be seen whether a) they can deliver meaningful and diversifying risk-adjusted returns and b) whether or not these more complex strategies will garner much interest from the ETF crowd that – let’s be honest – likes their ice cream plain vanilla:
12. B.Y.O.A. (Bring Your Own Assets!)
One of the more interesting trends in ETF launches the past couple years has been the entrance of large banks, insurance companies, and traditional mutual fund asset managers into the ETF space. This phenomenon is described by Bloomberg’s Eric Balchunas as “Bring Your Own Assets” in reference to the fact that – unlike some of the true upstarts in the industry – these heavy hitters have a leg up on the competition by being able to tap into a substantial existing investor base. “Having a brand and having customers who trust you is a huge deal,” Balchunas said.
A few years ago it was big banks like J.P. Morgan and Goldman Sachs making their presence felt in ETFs. In contrast, 2017 saw insurance companies like USAA, Nationwide, and Transamerica dipping their toes in the water.
13. The Data Revolution and A.I.
Motif Investing CEO Hardeep Walia spoke at length about the impacts that the Data Revolution and Artificial Intelligence are having (and will have) on investing. What this looks like ten years from now is anyone’s guess, but it’s safe to say that new, or alternative, forms of data will play a major role in how active managers strive to add alpha.
Walia believes that the digitization of our world has created a data revolution and that the asset managers of the future will need to evolve their tools, processes, and personnel if they hope to achieve any sort of edge in their use of alternative data.
14. Sector Shakeups
While it didn’t get much attention at the conference, one of the bigger stories in index-land are the forthcoming changes to the Global Industry Classification Standard (GICS®) sector classifications. The full joint press release from MSCI and S&P Dow Jones can be found here, but the major change is that Telecommunication Services Sector is being expanded and renamed as Communication Services. A number of large companies will be reclassified with the change which will have a meaningful impact on sector composition. SPDR put together a nice chart with a before and after look at the various sector weightings:
Source: SPDR Blog, “GICS Changes Upend the Sector Apple Cart. What Does it Mean for Investors?”
15. Hidden Gems
I thought this session was a great idea. With so much attention paid to the “Big Three” ETF providers, it was a nice opportunity for some of the lesser known issuers to have a platform to share their funds’ stories. Without getting too specific into fund names or tickers, this session covered ETFs targeting the following:
- Israeli tech
- Sentiment leaders
- Consumer satisfaction
- High-income, pass through securities
- Political policies
- Dividends for rising rate
- Medical breakthroughs
- Emerging Markets internet & e-commerce
- Emerging Markets Ex-State Owned Enterprises
- Fundamental Commodities
- Short duration, enhanced yield aggregate bonds
- Hedge Fund replication
The niche nature of almost all of the above just goes to show how “outside the box” smaller ETF companies need to be to try and compete with the big dogs. While most of these are not exactly my cup of tea, I appreciate that not everybody invests the way I do and can applaud the creativity on display.
16. Breaking The Rules
DoubleLine Capital’s “other Jeffrey” – Deputy CIO Jeffrey Sherman – gave a talk centered on the idea of Quantitative Tightening and its potential impact on financial markets. Some highlights:
- Have not had coordinated global growth since 2010
- The most important market to be thinking about is the European bond market
- There is a disconnect between the ECB raising growth forecasts and their continued loose monetary policy – something’s got to give.
- Cumulative Real GDP growth in the current recovery tell two different stories – duration and magnitude.
- If people *think* inflation is going up, behavior changes significantly.
- 30 yr still loyal to the bond bull market. The rest of the curve is in disagreement.
- DoubleLine’s view is that investment grade corporates are quite expensive relative to treasuries and that the mortgage market is much more fairly valued.
17. Face the FaCS
Index provider MSCI certainly made their presence felt throughout the week, particularly as it relates to their recently launched Factor Classification System, or FaCS.
Source: MSCI, “Creating A Common Language for Factor Investing”
Factor Investing is unquestionably en vogue at the moment. Given the plethora of factors with which investors can now build high precision portfolios (Value, Momentum, Quality, Size, Yield, etc.), it begs the question as to whether the stalwart Morningstar Style Box, which focuses solely on two dimensions – value and size – has become dated. While I don’t see the Style Box disappearing any time soon, I welcome this new tool as an additional resource to allow investors to measure their funds’ exposures across a broader set of dimensions.
18. Crypto Buzz
Few things had more buzz around them at this year’s conference than Bitcoin and Cryptocurrencies. Six months ago, it seemed like a foregone conclusion that there would be a true Bitcoin ETF sometime in 2018. Now? Not so much.
The conference took place just a few days after the SEC released a letter expressing their five major concerns with allowing cryptocurrency funds to trade on U.S. exchanges:
- Potential Manipulation
Jeremy Senderowicz, an attorney and expert on laws pertaining to ETFs and mutual funds, spoke at this year’s conference and had the following to say:
“I think it would be tough to see an exchange-traded bitcoin product in the next 12 months. There’s going to have to be a very robust response from the industry to the SEC’s concerns. The underlying market for bitcoin has to evolve.”
19. Will ESG Reach its Tipping Point?
There is a massive gap between the amount of coverage ESG investing gets and the amount of money that actually flows into ESG focused funds. There have been so many ESG-related products launched over the past few years – some broad-based, others narrowly focused – that investors now have the tools to build an entire diversified portfolio using solely funds with some sort of sustainability focus. The question now is – will they?
Separate from ESG products themselves is the change in tone coming from the world’s largest ETF providers that are now taking a more vocal role in the governance of the corporations that they own more and more of with each passing day. Recent examples of this include BlackRock CEO Larry Fink’s warning letter imploring CEOs of public companies to serve a social purpose and State Street’s voting against 400 companies’ board re-election plans due to a lack of gender diversity.
20. Are We In A Bubble?
Mohamed El-Erian gave a keynote and kicked things off by asking attendees to vote in real-time via the conference app whether or not they thought we were in a bubble. Before he began his presentation, 33 percent of respondents thought we were in a bubble.
El-Erian then went on to give his opinion that the synchronized pickup in global growth was real and multi-dimensional. By real, he means that it not because of leverage and debt, but because of consumption and trade. While he expects positive returns to continue in risk assets, he predicted a bumpier ride than last year (Editor’s Note: He nailed that one!).
He also pointed out that the current environment is as much about what hasn’t occurred vs what has occurred, namely a geopolitical shock and a misstep from the Fed in unwinding its balance sheet.
At the end, he asked attendees to the same question about whether or not we are in a bubble. This time only 26 percent thought we were in a bubble. Ahh, the power of persuasion
21. The Award for Best Tchotchke Goes To…
GraniteShares with the spherical ice cube mold!
22. Outside ETFs
One thing Inside ETFs has alway done a nice job of is bringing in speakers from outside the finance industry. In addition to the aforementioned Quincy Jones interview, we were also treated to a fireside chat (sans fire) with Barry Ritholtz interviewing tennis legend Serena Williams, and Lessons in Leadership from General Stanley McChrystal.
23. Shooting Black Swans
Kevin Grogan of Buckingham Strategic Wealth (filling in for the under-the-weather Larry Swedroe) provided a great perspective on how to tackle tail risk (or “Black Swans”) in portfolios. Given the volatility we’ve experienced over the past week, this presentation proved to be quite timely.
Instead of incorporating negative expected return strategies into a portfolio as a form of insurance, Grogan instead advocated that investors broaden the types of risks they allocate to in order to narrow the spectrum of outcomes. Kevin spoke about the changing perspective of alternative investments from one of exorbitant fees and empty promises to one of increased liquidity, academic evidence and lower fees. Namely, he references Reinsurance, Variance Risk Premium, Alternative Lending, and Long-Short Style Premia as examples of strategies investors can incorporate into a traditional portfolio to achieve more risk diversification.
24. The Whales and the Minnows
The ETF industry is truly a case of the haves and the have-nots. According to a recent Financial Times article:
- The Big Three – Vanguard, iShares and State Street – account for roughly three-quarters of assets.
- Five funds alone account for nearly 20 percent of assets.
- Thirty funds account for nearly half the assets.
- The roughly two thousand smallest ETFs account for only about a fifth of assets.
- There are more than 3,200 funds that have less than $50M in AUM
The article also points out that while it has never been easier to launch an ETF, the odds of survival have never been lower. Industry consolidation through M&A is likely to continue, with the PowerShares acquisition of Guggenheim’s ETF business being the latest example of firms scrambling to grow market share.
25. Building a Brand Through Blogging and Social Media
And last but not least, it was an honor to partake in my first Inside ETFs panel. As someone who has attended the conference many times before, it was a real treat to be able to speak there as well. Even better was that I got to share the stage with my friends and fellow bloggers, Peter Lazaroff and Bob Seawright, both of whom I admire greatly.
Julie Cooling, CEO & Founder of RIA Database and RIA Channel, did a fantastic job moderating our discussion about developing a brand through the use of social media and blogging. I was delighted by the number of people that showed up and the thoughtful questions that they asked. We covered a ton of ground including where we find inspiration, who we like to read the most, how we make time to write, frequency of posts, compliance issues and a whole lot more.
I can only hope that the folks running Inside ETFs invite me back to do it again next year!
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