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Bucking the trend was the unofficial theme of InsideETFs this year, an annual Spring Break—like conference where exchange-traded fund industry folk shake off the frost and head to Hollywood, Fla. This year, the confab seemed faster-paced, more crowded, and a wee bit bizarre.
The biggest ETF issuer in the world,
BlackRock
’s
(ticker: BLK) iShares, was largely absent, forgoing last year’s enormous coffee bar and lounge for a tiny booth tucked away in the back corner of the exhibit hall, and with zero speakers or panelists. But this was not your older brother’s ETF conference, and virtually no one—not even Vanguard—was talking about passive, broad-market index investing. Cardi B rang from the loudspeakers and a rap battle broke out onstage. Vanguard made the case for active management. The (SPY) is no longer the coolest kid on the block. Gold is in. Pot is hot. And financial advice is apparently disruption-proof. The biggest ETF trends for 2019, insiders say, run counter to the trends of the past few years.
Indexing juggernaut Vanguard kicked off the conference with a keynote speech that made the case for active management. When stocks swoon, fixed-income products are a good place to hide out in, said Vanguard Chief Investment Officer Greg Davis, highlighting the merits of low-cost actively managed bond funds. “High-cost active fixed-income funds will erode returns.…Low-cost will increase the likelihood of success,” he said. Investors have wised up to this: Fixed-income investors are paying 30% less for actively managed funds and 60% less for index funds, based on asset-weighted average fees over the past 17 years, according to ICI. However, for indexed bond ETFs, many of which didn’t come to market until 2007, fees have actually risen slightly since then.
ETF flows are a good tell for investor sentiment, said Deborah Fuhr, co-founder of ETFGI, a research firm that tracks where the money is going. If January is any indication of what’s to come for the rest of the year, investors are rushing into short-term fixed-income, money-market, and commodity ETFs—all segments of the market that have only recently become popular as the stock market swooned last year. Fuhr also noted, “Smart-beta or factor ETFs haven’t grown as much as people initially thought.” That probably has everything to do with the initial expectation that the industry could charge more for them, but
Goldman Sachs
squashed that plan when it launched its version at nine basis points, or just $9 in annual fees for every $10,000 invested. Industry surveys also show that issuers aren’t as interested in launching factor products as they are in active strategies, for which they could charge more.
In the thematic corner, pot ETFs are the new Bitcoin. The biggest marijuana ETF on the market,
ETFMG Alternative Harvest
(MJ) recently exceeded $1 billion in assets, while the one U.S. Bitcoin trust Grayscale Bitcoin (GBTC) has shrunk to $745 million as crypto entered bear territory.
Not very long ago, people said advisors had to build a robo-advisor to survive, said Josh Brown, chief of Ritholtz Wealth Management. Brown described how the firm entered the technology-arms race, investing in a start-up to build its own robo, only to get burned in the process. “It would’ve cost us nothing to wait. We could’ve watched everyone else try and fail,” said Brown.
That’s an important lesson for investors as well as advisors. Market anxiety will bring all manner of complicated strategies billed as “solutions.” And they will probably cost more. If countertrends prevail, the low-cost revolution maybe comes to an end—hard to imagine but it’s not outside the realm of possibility.
Write to Crystal Kim at crystal.kim@dowjones.com
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