Early Days For ETFs

Max Osbon - January 29, 2014

What happens when 1,500 people get together to talk about ETFs? Four days of keynote speeches, panels, and booth presentations… and here’s what I witnessed:

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Matt Hougan (CEO ETF.com) and Dave Nadig (CIO ETF.com) opened the conference calling for ETF assets to reach $15.5 trillion in 10 years, up from $2.3 trillion right now. That would eclipse the size of the mutual fund market. Is it likely to happen? We think so.

More competitive products helps drive down costs but also leads to some departures from ideals of industry in general.


Product proliferation masked as innovation
It’s easier than ever to start an ETF, as seen by the 2,000+ and growing that are currently available. Do we really need 2,000+ ETFs? Advisors can help you sort through the noise of strategies, leverage, and other “innovations” that do little more than help to market the fund itself. The spectrum in ETFs these days includes everything from strict rules based indexed ETFs, from providers like Vanguard, to actively managed ETFs, from Pimco.

Past is not prologue
Beware of back tested strategies. No one launches a product without testing it in the lab: see drug companies. In contrast to the drug industry, the finance industry has few to no limits on the styles of products it can release to the public, regardless of testing. Leave it to the investors to decide what works and what doesn’t.

The Keynote Cast:

Tim Buckley, CIO of Vanguard Group, explained how his recent research shows that discipline, managing taxes, keeping an eye on costs, and rebalancing can add an additional 300 basis points to performance each year. That’s real money. We will send this study out after it is published in the next few months.

Liz Ann Sonders, SVP Charles Schwab, expects a 10% correction in the US equity markets in 2014 but she is excited about the prospects of the US manufacturing renaissance, known as in-sourcing or re-shoring. (Manufacturing represents 13% of the US Economy)

Nouriel Roubini, aka Dr. Doom, expects 2014 to show US equity returns that are “good but not as good as last year” at around 7-9% and US Bond yields to reach 3.4%. He also expects emerging market returns to clock at around 5% for the year. His concerns center around the possibility of a limited war between China and Japan.

The Onion: The writers of the satirical newspaper The Onion were true to form when they opened their speech at the ETF conference with, “Don’t get involved in the ETF industry – it’s going nowhere”.

Lee Kranefuss, founder of iShares, expects the adoption of ETFs to be driven largely by a wider and clearer understanding of the virtues of exchange traded fund investing.

Jeremy Siegel, famous for his fundamental investment research, says the US Equity markets are right at fair value – not over or under valued – and calls for the Dow to reach 18,000. He also points out that equity markets display the strongest tendency to revert to its mean historical return as seen below:

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