Leveling the Playing Field

Transcription

1 Leveling the Playing Field Matt Hougan President Analytics & Publications ETF.com Dave Nadig Chief Investment Officer ETF.com

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4 1 The ETF Revolution Is Just Getting Started

5 2 Bad Things Are Happening

6 3 Level The Playing Field

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8 Billions $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- ETP Asset Growth

9 Billions $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- ETP Asset Growth

10 Billions $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- ETP Asset Growth

11 Billions $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- ETP Asset Growth

12 Billions $6,000 ETP Asset Growth $5,000 $4,000 $3,000 $2,000 $1,000 $

13 Billions $16,000 ETP Asset Growth $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $

14 WisdomTree (WETF) Stock Price $20 $15 $10 $5 $- 12/31/2010 1/24/2014

15 $1.7 trillion Built on a narrow base

16 ETF Hockey Stick Checklist Total Cost Taxes Institutional Advisory Retail Trading Diversity Distribution

17 Total Cost ETFs cost fund companies less than mutual funds. So ETFs cost investors less. Large Cap Equity ETFs: 0.44% Average Large Cap Equity Mutual Funds: 1.37% Average

18 How Much Are ETF Investors Saving? Average Mutual Fund AUM ($, mm) Average ETF ER ER U.S. Equity 931, % 1.37% International Equity 406, % 1.57% Fixed Income 249, % 1.06% Annual Fees As ETFs: $7.2 billion Annual Fees As Funds: $21.9 billion Source: Morningstar, ETF.com

19 Who s Got The Yachts Now? $14,761,886,000 Per Year (That s $40.4 million per day) Source: ETF.com as of 12/31/2013

20 But What About For Institutions?

21 Institutional Holding Periods 40% 30% 20% 10% 0% <1 month 1-6 months 7-12 months 1-2 years >2 years Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q

22 New Uses At The Core Although ETFs first entered institutional portfolios mainly as tactical tools many institutions indicate they are beginning to regularly use ETFs for many additional purposes, including gaining long-term exposures and implementing investment strategies. - Greenwich Associates Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q

23 We had not used ETFs in any meaningful fashion previously Very much to their credit, ishares priced these ETFs at 15 basis points. Dave Underwood, CIO, Arizona State Retirement System, in an interview with the Journal of Indexes

24 ETF Hockey Stick Checklist Institutional Advisory Retail Total Cost Taxes Trading Diversity Distribution

25 Taxes Active MF Source: Morningstar 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,

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27 ETF Tax Scandal: I Sell, You Pay!

28 Billions Avg. Mutual Fund Flows By Month $25,000 $20,000 $15,000 $10,000 $5,000 $0 -$5,000 -$10,000 Source: Investment Company Institute

29 ETF Hockey Stick Checklist Institutional Advisory Retail Total Cost Taxes N/A Trading Diversity Distribution

30 % of Total Market (incl. OTC/BB) 40% ETF Trading Activity 30% 20% 10% 0% 10/1/2012 9/30/2013 % of Shares Traded % of Value Traded

31 NYSE Most Actives (Friday) Ticker Volume (millions) SPY 183 EEM 117 BAC 111 GE 95 XKF 66 F 64 VXX 61 AA 59 C 55 IWM 52

32 Ticker Average Spread IWM (Russel 2000) 0.01% EEM (Emerging Markets) 0.02% JNK (Junk Bonds) 0.02% GLD (Gold) 0.01%

33 ETF Hockey Stick Checklist Institutional Advisory Retail Total Cost Taxes? Trading Diversity Distribution

34 Diversity Pure Active Nerdy Quant Stuff Pure Beta

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36 People who dig ETFs? $1.7 Trillion People who dig: $2 Trillion Bill Gross?

37 ETF Hockey Stick Checklist Institutional Advisory Retail Total Cost Taxes? Trading Diversity Distribution

38 Institutions 55% of ETF Assets 18% of Institutions

39 Advisors 26,300 Advisors $920 Billion In Assets

40 Retail

41 The 10 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% U.S. Commodity Index Fund USCI 1.03% All-In Costs 0.10%

42 The 11 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 20% ishares Core Total U.S. Bond AGG 0.08% REITs 5% ishares Cohen & Steers REIT ICF 0.35% All-In Costs 0.11%

43 The 39 BPS ETF Portfolio Asset Class Weight Fund Ticker ER U.S. Equity 35% ishares MSCI USA Quality Factor QUAL 0.15% Developed Equity 20% db X-trackers MSCI EAFE Hedged Equity DBEF 0.35% EM Equity 10% WisdomTree Emerging Market Equity Income DEM 0.63% EM Equity 5% db X-Trackers Harvest CSI China A- Shares ASHR 0.82% Fixed Income 10% PIMCO Total Return Bond BOND 0.55% Fixed Income 5% PowerShares Senior Loan Portfolio BKLN 0.65% Fixed Income 5% SPDRs Barclays Short-Term High Yield SJNK 0.40% Fixed Income 5% Vanguard Total International Bond BNDX 0.20% Commodities 5% PowerShares DB Commodity DBC 0.93% All-In Costs 0.39%

44 Price: Zero to 0.25%

45 ETF Hockey Stick Checklist Institutional Advisory Retail Total Cost Taxes? Trading Diversity Distribution

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47 The Gold Rush Problem

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49 Toxic Products ½ of Smart Beta is Junk 4 Worries Pay-to-Play ETF Lipstick Active Pigs

50 Total Return Toxic Products 20% VXX Since Inception 0% -20% -40% -60% -80% -100% 1/29/2009 1/17/2014

51 Crowding 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% % % % 5/4/2011 5/4/2012 5/4/2013 ½ of Smart Beta is Junk SPLV SPY

52 0.00% -0.05% -0.10% -0.15% -0.20% -0.25% -0.30% -0.35% -0.40% Tracking USMV 1-Year Tracking Difference ½ of Smart Beta is Junk

53 Premium/Discount Flows ($, Millions) 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% Trading ½ of Smart Beta is Junk VIDI Fund Flows (Millions) VIDI Premium

54 Zero Commission Zero Cost Pay-to-Play

55 ETF Lipstick Active Pigs

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57 WisdomTree Middle East Dividend (GULF) Schwab Emerging Markets Equity (SCHE) ishares Core MSCI Emerging Markets (IEMG)

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60 Demo Time!

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62 ETF.com Analytics $ 1,

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82 Instant ETF Check: ETF.com/(ticker) ETF.com/finder ETF.com/segments Morning Call

83 One More Thing

84 Alpha Think Tank

85 Alpha Think Tank Nouriel Roubini, Roubini Global Economics Don Luskin, TrendMacrolytics George Friedman, Stratfor Ed Yardeni, Yardeni Economics Tom Dorsey, Dorsey Wright Associates Peter Schiff, Euro-Pacific Capital Brendan Fitzsimmons, Medley Global Advisors Rob Arnott, Research Affiliates

86 Asks: What is the one area of the market you find most attractive right now?

87 Don Luskin: Peripheral Europe. If you wanted to build a new auto factory somewhere in the world, you would either put it in Tennessee or in Spain. And that s great.

88 Luskin s call on Spain may raise a few eyebrows, but there is a solid ETF to play a resurgent Spanish economy: ishares MSCI Spain Capped ETF. While not exactly cheap, the fund provides broad exposure and trades reasonably well. Be conscious of a heavy weighting in Financials, however. Don s other ideas

89 50 issues per year $299