8:50 AM: Last question. Time for the panelists’ ETF predictions for the next 12 months.
Rosenbluth says he believes active equity ETFs will be the big gainers.
Johnson says the overwhelming majority of flows will go into low-cost, boring, cap-weighted funds.
Balchunas says you’ll see more ETF closures than launches.
Kashner says we’ll see more downside protection products come to market.
Hougan says we’ll see a meltdown in the active fixed income mutual fund market.
Nadig says we’ll see increased focus on corporate governance from investors.
8:50 AM: Lydon brings up the Michael Burry’s allegation that passive investing is destroying price discovery and thus the markets. “Literally every data point he points to is wrong,” says Nadig. He brings up the fact that correlations are not collapsing; more price discovery is happening than ever before.
Balchunas adds that there’s a perception that passive investors are “weak hands” who will flee the market the moment it wobbles. That’s just not true, he says. “I’ve yet to see evidence that index investors are the first ones to panic and head for the hills.”
8:47 AM: Hougan says bitcoin has stabilized. Rosenbluth’s eyes pop. “Did you say stabilize? Bitcoin?” Hougan says that volatility has gone down significantly over the past several months.
Bitcoin “feels like very expensive therapy,” says Kashner.
8:45 AM: Now the topic moves to bitcoin ETFs. A lot of the hurdles preventing an ETF’s approval have gone away, says Hougan. He demurs on predictions, but “I will say we’re much, much closer.”
He also brings up that institutional money is still flowing into digital assets, through non-ETF products. “A couple hundred million dollars a week are going into these other channels.”
“I think every advisor out there has a client who has asked them about crypto,” he adds. “And they want to have an answer on hand.”
8:40 AM: The topic shifts to non-transparent active ETFs. “I think this is a solution in search of a problem, and one that ETF investors don’t face,” says Johnson. This is for active managers who don’t want to give away their proprietary strategy, he says. “Frankly, they’re flattering themselves if anybody cares.”
In ETFs, active managers can only invest in so many things, he says. “Why would you want to get active management with handcuffs on?” Also, active managers when they enter ETFs forfeit their ability to close their fund.
“It’s easy to look at a room full of advisors and investors and ask who is this product for?” says Nadig. “But this structure is for institutions who still have enormous allocations to actively managed mutual funds who desperately want to manage their liquidity.”
“It’s easy for us to forget there is more money in active equity mutual funds than in passive funds,” adds Rosenbluth. “They would love to keep the same product they already have, except they’ll pay less and have it in an easier way.”
8:33 AM: Thematic investing is really picking up, says Rosenbluth. Instead of having to choose between Amazon.com and Pets.com, advisors can just buy a diversified basket of stocks.
Thematic investing has always been popular, says Johnson. “The ETF graveyard is littered with shiny ideas.” He brings up the shipping ETF, the whisky ETF. “Just know the risks of what you’re getting into.”
“I think of thematic ETFs as behavioral release valve for your clients,” says Hougan. “This gives them a relatively safe way to not blow themselves up, but still give them a way to participate in interesting corners of the market.”
8:28 AM: The topic switches to ESG. Kashner says that in this space, there are clear signs of investor interest and the fee war. She brings up Ilmarinen’s seeding of the SUSL and USSG earlier the year.
Lydon asks, “Will there ever be demand?” The panel laughs. “There is demand,” says Rosenbluth.
Nadig brings up the fact that $13 trillion of institutional dollars are tied to ESG mandates. He says we’re going to see growth in bespoke institutional ETF products, like SUSL and USSG, and in retail interest in ESG-wrappered products.
Hougan says he’s surprised that we haven’t seen any reskinning of traditional ETFs with an ESG overlay, as Larry Fink hinted at in his shareholder letter last year.
8:23 AM: “The better question is, ‘Should advisors be buying the AGG?'” says Balchunas. It’s incredibly easy to beat the AGG, he adds.
Johnson says you have to remember why people buy bonds: to diversify equity risk. “Should you use your bond portfolio for alpha generation?”
Kashner agrees: “Maybe performance-chasing in the bond market isn’t the best idea.”
8:20 AM: The topic shifts to fixed income, and whether it’s OK that investors are ‘splitting out’ the AGG.
“It’s important not to lose sight of the fact that in fixed income markets, you still see solid performance,” says Johnson. “The other piece is, too, fixed income managers can only pull so many levers (credit and duration) and to the extent you can pull those on your own, it becomes a decision of active discretion. Do you want to outsource that active discretion to a manager? Or do you want to own it?” We’re also seeing higher use of fixed income ETFs among active managers, too, he adds.
“I think this has been horrible for most advisors,” disagrees Nadig. “The ETF market got this exactly wrong. The best thing you could do over the past 18 months is move to the absolute farthest duration possible. But investors did the exact opposite; they moved to the shortest space. It’s been an absolute bloodbath.”
8:15 AM: “The fee war is as real in the smart beta space as anywhere else,” adds Kashner. “Smart beta might actually be smart, if you paid only 3 basis points for it.”
“That makes it no different than active management, though,” says Johnson.
“It never was,” says Kashner.
“Smart beta has become synonymous with defense,” adds Nadig. “We have seen some growth in that space, but it’s been entirely in the defensive sector, products that are explicitly saying we’ll keep you out of trouble in rocky markets.”
8:13 AM: Hougan predicts that the money going into USMV will flee once the market shifts, because people don’t realize that they’re also equally exposed to momentum with that product. Smart beta flows in general have been anemic this year.
Nadig pops in to say the shift isn’t into beta products, per se. It’s into low cost. “There has been a huge change in investor behavior; it’s just into 3, 4 basis point products.”
8:10 AM: “ETFs are a swiss army knife,” says Johnson. “They’ve grown because they’ve benefited from the substitution effect away from individual securities.” But ETFs have also benefited from securities lending activity, he says, where create-to-lend activity exists to satisfy short interest, not long. “Trying to divine anything about investor sentiment based on ETF flows is awfully difficult.”
8:00 AM: We’re back! First up: “The Battle Of The ETF Pundits,” featuring Matt Hougan, Ben Johnson, Eric Balchunas, Elisabeth Kashner, Todd Rosenbluth, and our very own Dave Nadig. Moderator is Tom Lydon.
The first question goes to Kashner about setting the scene for ETFs in 2019. Most flows have gone into broad-based, low cost beta ETFs, she says, but she also mentions USMV, a factor ETF that FactSet’s research has shown actually meets its low vol objective. “I’m not a fan of smart beta, but we ran the numbers, and it works,” she says. “Flows have actually gone to a product that works!”
5:00 PM: Questions from the audience. “How do you view the counterpoint of risk and luck when solving the retirement income problem?” Schrager explains how timing is everything when it comes to retirement. “You want to lock in those lucky times,” she says. When you meet your goals, take the risk off the table and put it into a fixed income portfolio, then maybe put in some discretionary market in the markets, if you want to.
“Is there a field you haven’t researched, but would like to?” Schrager answers that there’s a bunch. “Once you heard how this community manages their risk, then you just want to know how they all do it.”
4:55 PM: Now Schrager is talking about horse breeding, and how the industry is going about it all wrong. “You’re definitely not going to be able to engineer the next Secretariat,” says Schrager. “But you can on average create a horse that will win more often.”
As she tells an anecdote about horse breeding “teasers,” the room is in stitches.
4:50 PM: More on risk: “We’ve set people up to think in terms about wealth, instead of income,” says Schrager. “If you know how much you need in retirement, and you’ve met that, then there’s no need to stay in risky markets beyond that.”
She talks about fixed income investing, and how when investors retire, they should move their portfolios into longer-duration instruments instead of short-duration Treasuries, for example, so that they’re less exposed to interest rate risk.
4:45 PM: Now the conversation has moved to risk. “There’s a lot of evidence that people who take a lot of risks get good at it,” says Schrager about professional poker players.
“He just sees risk everywhere,” says Schrager about Richard Burton, who read her dissertation and with whom she later worked. “When you start seeing risk everywhere, it really changes your world view.”
4:30 PM: First up: “An Economist Walks Into A Brothel…” where Ritholtz’s Blair DuQuesnay interviews author and economist Allison Schrager. Schrager first discusses her economic research on brothels, including financial literacy and lessons on negotiation skills with the employees there.
4:00 PM: Welcome to the ETF.com live blog of the first Wealth/Stack conference! The “by advisors, for advisors” conference, organized by mega-RIA Ritholtz Wealth Management, aims to bridge the gap between technology, investment management and practice management.
Over the next 2 1/2 days, we’ll be reporting live from the event, bringing you practical tips and the latest insights from some of the smartest minds in the advisory business. Our coverage starts later today with the 4:30 p.m. PT panel, “An Economist Walks Into A Brothel …” Keep checking back for more!
