ETFs 101: The Hows & Whys. Matt Hougan Moderator President Analytics & Publications ETF.com

Transcription

1 ETFs 101: The Hows & Whys Matt Hougan Moderator President Analytics & Publications ETF.com

2 ETF Assets: Up And To The Right Source: IndexUniverse as of 12/31/2013

3 Funds ETFs ($953) $104, Flows Millions Source: Morningstar, IndexUniverse

4 Funds ETFs ($237,161) $122, Flows Millions Source: Morningstar, IndexUniverse

5 Funds ETFs ($33,251) $119, Flows Millions Source: Morningstar, IndexUniverse

6 Funds ETFs $196,459 $188, Flows Millions Source: Morningstar, IndexUniverse

7 Funds ETFs $155,459 $188, Flows Millions Source: Morningstar, IndexUniverse

8 Funds ETFs ($81,041) $772,291 Past Five Years Millions Source: Morningstar, IndexUniverse

9 Why ETFs?

10 How Much Are ETF Investors Saving? AUM ($, mm) Average ETF ER Average Mutual Fund ER U.S. Equity 931, % 1.43% International Equity 406, % 1.57%% Fixed Income 249, % 1.06% Annual Fees As ETFs: $7.9 billion Annual Fees As Funds: $22.4 billion Source: Morningstar, IndexUniverse

11 Who s Got The Yachts Now? $14,482,380,500 Per Year (That s $39.7 million per day) Source: IndexUniverse as of 12/31/2013

12 And Low Costs Aren t The Only Benefit Lower Costs Tax Efficiency Intraday Trading Transparency Access To Anything

13

14 What Are The Hidden Risk?

15 How A Mutual Fund Works $10,000 $10,000 $10,000 $10,000

16 How A Mutual Fund Works $10,000 $10,000 $10,000 $10,000 $100 $100 $100 $100 $40,000

17 How A Mutual Fund Works $200 $100 $200 $100 $200 $100 $200 $100 $40,000 $80,000

18 How A Mutual Fund Works $200 $200 $200 $200 $20,000 $80,000 $60,000

19 How A Mutual Fund Works $200 $200 $20,000 $200 $200 $10,000 $60,000 $70,000

20 How It Really Works $10,000 of XYZAB Please!

21 How It Really Works $10,000 of XYZAB Please! Broker

22 How It Really Works $10,000 of XYZAB Please! Broker $10,000 $14.23 Assets: $120,358, Shares: 8,458, Net Asset Value: $14.23

23 How An ETF Works 100 shares of SPY Please! Broker $9,723 $97.23

24 How An ETF Works ETFs, Inc.?

25 ETF Anatomy: Creation/Redemption Authorized Participant $2.5 million 100K Inc. $25 MSFT AAPL CSCO CAT IBM

26 ETF Anatomy: Creation/Redemption Authorized Participant $25 IBM ETFs, Inc. MSFT AAPL CAT CSCO

27 ETF Anatomy: Creation/Redemption Authorized Participant $25 ETFs, Inc. MSFT CSCO AAPL IBM CAT

28 Why Be an AP? Authorized Participant $25.00 Fair Value $25.00 $25.00

29 Why Be an AP? Authorized Participant $25.10 Fair Value $25.00 $25.00

30 Why Be an AP? Sell! $25.10 Authorized Participant $25.10 Fair Value $25.00 $25.00

31 Why Be an AP? IBM MSFT AAPL CAT CSCO Buy Holdings! Authorized Participant $25.10 Fair Value $25.00 $25.00

32 Why Be an AP? Authorized Participant Selling Pressure $25.01 Fair Value $25.01 $25.01 Buying Pressure

33 Why Be an AP? Bought: $25.00 Sold: $25.10 Margin: $.10 Authorized Participant Selling Pressure $25.01 Fair Value $25.01 $25.01 Buying Pressure

34 Why Be an AP? Buy! $24.90 Authorized Participant Fair Value $25.00 $25.00 $24.90

35 Why Be an AP? IBM MSFT AAPL CAT CSCO Sell Holdings! Authorized Participant Fair Value $25.00 $25.00 $24.90

36 Why Be an AP? Bought: $24.90 Sold: $25.00 Margin: $.10 Authorized Participant Selling Pressure Buying Pressure Fair Value $24.99 $24.99

37 The Benefits and Risks of ETFs Are Not Accidental

38 Benefit 1: Intraday Trading Trade anytime the market s open

39 Benefit 1: Intraday Trading Why Do ETFs Represent 25% Of All Trading Volume, When CEFs Represent Less Than 1%? Creation/Redemption Keeps ETF Prices Fair

40 The Beauty of inav Source: Bloomberg as of 03/14/2012

41 Benefit 2: Lower Costs ETFs cost fund companies less. So ETFs cost investors less. Large Cap Equity ETFs: 0.44% Average Large Cap Equity Mutual Funds: 1.37% Average

42 Why Are ETFs Cheaper? Greed

43 Why Are ETFs Cheaper? Function

44 Why Are ETFs Cheaper? Distribution

45 Benefit 3: Tax Efficiency Active MF Passive MF ETF Large Cap Blend 1.92% 0.16% 0.00% Large Cap Value 2.01% 0.08% 0.00% Large Cap Growth 1.65% 0.04% 0.00% Mid Cap Blend 4.26% 1.25% 0.00% Small Cap Blend 3.54% 1.31% 0.00% Foreign Large Blend 2.50% 0.32% 0.00% Emerging Market 6.46% 0.02% 0.01% Source: Morningstar

46 Benefit 4: Transparency Daily Disclosure vs. Whenever we want

47 Benefit 5: Access 1499 ETFs 150+ new in in Registration Source: IndexUniverse as of 12/31/2013

48 Benefit 5: Access by Asset Class U.S. Equity 404 International Equity 417 U.S. Fixed Income 157 International Fixed Income 56 Commodities 104 Currency 23 Leveraged 123 Inverse 135 Asset Allocation 35 Alternatives 44 Total: 1499 Source: IndexUniverse as of 12/31/2013

49 Issues With ETFs

50 Issue: Flash Crash Rydex S&P 500 Equal-Weight ETF (NYSEArca: RSP)

51 Issue: Commissions Every transaction has a cost, no matter how low* *Note new zero-cost commission ETF programs

52 Issue: Spreads Liquid Funds = Penny Spreads Illiquid Funds = > 4% Spreads

53 Issue: Fair Value Most ETFs trade close to NAV But all funds can get out of balance

54 Issue: Fair Value?

55 Issue: Tax Treatment Product Category Long-Term Max Rate Equities 20% Bonds 20% Commodity ETFs (Futures) 28%* Commodity ETNs 20% Commodity ETFs (Bullion-based) 28% Currency ETFs 38.6% Currency ETNs 38.6% Certain WisdomTree Currency ETFs 20%

56 Issue: ETF Choice 23% difference between highest and lowest

57 Issue: ETF Choice

58 ETF Issue: Complex ETFs

59 How Leveraged/Inverse Funds Work Day 1: Index Level: % ETF Level: 100 Day 2: Index up 10% Index Level: % ETF Level: 80 Day 3: Index down 10% Index Level: % ETF Level: 96

60 ETF Issue: Complex ETFS

61 The 9 BPS ETF Portfolio Asset Class Weight Fund Ticker ER U.S. Equity 40% Schwab U.S. Broad Equity SCHB 0.04% Developed Equity Emerging Markets Equity 30% Schwab International Equity SCHF 0.09% 5% Schwab Emerging Markets Equity SCHE 0.15% Fixed Income 15% Schwab U.S. Aggregate Bond SCHZ 0.05% REITs 5% Schwab U.S. REIT SCHH 0.07% Commodities 5% UBS E-TRACS DJ-UBS Commodity ETN DJCI 0.50% All-In Costs 0.09%

62 The 10 BPS ETF Portfolio Asset Class Weight Fund Ticker ER U.S. Equity 40% Vanguard Total Market VTI 0.05% Developed Equity Emerging Markets Equity 30% Vanguard FTSE Developed Markets VEA 0.10% 5% Vanguard Emerging Markets VWO 0.18% Fixed Income 15% Vanguard Total Market Bond BND 0.10% REITs 5% Vanguard REIT VNQ 0.10% Commodities 5% UBS E-TRACS DJ-UBS Commodity ETN DJCI 0.50% All-In Costs 0.10%

63 The 13 BPS ETF Portfolio Asset Class Weight Fund Ticker ER U.S. Equity 40% ishares Core S&P Total U.S. Stock ITOT 0.07% Developed Equity Emerging Markets Equity 30% ishares Core MSCI EAFE IEFA 0.14% 5% ishares Core Emerging Markets IEMG 0.18% Fixed Income 15% ishares Core Total U.S. Bond BND 0.08% REITs 5% ishares Cohen & Steers REIT ICF 0.35% Commodities 5% UBS E-TRACS DJ-UBS Commodity ETN DJCI 0.50% All-In Costs 0.10%

64 The 26 BPS ETF Portfolio Asset Class Weight Fund Ticker ER U.S. Equity 40% Schwab U.S. Broad Equity SCHB 0.04% Developed Equity Emerging Markets Equity 30% DB X-Trackers MSCI EAFE Hedged DBEF 0.35% 5% PowerShares S&P Emerging Markets Low Volatility EELV 0.29% Fixed Income 15% Pimco Total Return Bond BOND 0.55% REITs 5% Vanguard REIT VNQ 0.10% Commodities 5% PowerShares DB Commodity DBC 0.75% All-In Costs 0.09%

65 Thank You. Questions?

66 ETFs 101: The Hows & Whys Matt Hougan Moderator President Analytics & Publications ETF.com