Mike Bloomberg and Jack Bogle addressed a full house crowd this month at the Bloomberg ETFs In Depth conference in New York. The four hour event was a multi-course meal of hot button topics from debates on financial innovation, to Josh “Retired Broker” Brown’s favorite emerging market: Detroit. Here are my highlights:
Bloomberg LP founder and three-term mayor of New York City Mike Bloomberg started off the conference with some quick words on ETFs. “I use them. I don’t pick the specific ETFs myself, but we use them in my foundation.” And so the list of elite financial celebrities using ETFs keeps growing. If ETFs meet the high standards of Mike, Warren Buffett, Harvard University, etc., we think they make sense for all levels of individual investors, including our clients.
For individuals, this is a crucial question that too often is not explicitly considered. Rick Ferri, founder of Portfolio Solutions, says, “You’re not trying to beat the market, you’re trying to buy a house, pay for college. Those are goals.”
Jack Bogle, founder of Vanguard and father of the index fund, came out strong against actively managed mutual funds. “Active managers are going to fall short over time because of cost. The average mutual fund costs one percent to own. I know who’s winning there, and you do too, and it’s not the investor.”
There are 1,800 ETFs available to US investors today but many experts throughout the conference predicted that number will rise to 5,000. Jack Bogle says there are about one hundred good ones and the rest are marketing gimmicks. Joel Dickson, also of Vanguard, says this is all just “indexification” of active management. Brokerage firms see the consumer demand and say, “Hey! Let’s make an ETF!” Remember that an ETF is just a method of owning a basket of underlying stocks. At Osbon Capital, we prefer rules-based, transparent, low cost ETFs tied to well known market cap based indexes with sufficient market volume and asset size. Many ETFs are none of those things.
Rick Ferri spoke about how ETFs help him achieve his fiduciary duty to clients, “As a fiduciary, I have to get the best execution.” True fiduciary advice, which by definition must be completely aligned with client interests, can’t coexist with the conflicts of interest inherent in selling/brokering financial products. Mutual funds are analog. ETFs are digital. There are no juicy brokerage commissions tied to ETFs. In contrast, if your advisor is also a broker or employed by a broker, you most likely own a bunch of mutual funds that generate nice commissions and fees at your expense. See JPMorgan’s $307 million fine this week on this very issue.
The Dow opened down 1,000 pts on August 24th and a lot was written about the role of ETFs in the volatility of the day. VHT, the Vanguard Health Care ETF, dropped 27 percent, trading below its intrinsic value for 30 minutes. It recovered within the hour and finished the day down 3 percent. Panelists of the day agreed that ETFs performed as they were designed. Many retail investors got burned by stop loss orders triggering unwanted sells at market prices that were well below their fair market value; that’s what happens when you don’t use a limit trade. Paris Smith, Principal of Wolverine Trading says to always use a limit trade. In fact he says if he catches you using a market order on his desk, you’re fired on the spot. The specifics matter only when they matter. There is, however, a simple antidote to days like Aug 24th… simply wait a day or two for the volatility to subside. Don’t raise your sails in a hurricane expecting to out-hustle the wind.
Dave Mazza, head of research for SPDR ETFs, addressed concerns about bond liquidity and ETFs. People are worried that you can trade a liquid ETF that holds illiquid bonds. It’s a reasonably logical concern except that at $340 billion in total assets, fixed income ETFs are far too small to influence the $33 trillion US bond market. Not every security needs to be priced to market every day. In fact, fixed income ETFs help quite a bit with price discovery in bond markets that don’t trade very often.
Max Osbon – firstname.lastname@example.org