The world’s premier ETF conference convened in Hollywood, Florida this past week with pretty much everyone who’s anyone in ETFs attending. Financial advisors, fund companies, and analysts were among the 2,300+ attendees preaching or being preached the ETF gospel. From my perch, this year’s conference had a bit of a different feel. It was the feel of an industry maturing and moving mainstream. Back in the day, only the “cool kids” (or geeks, depending on your perspective 😊) were at the ETF party. Now, everyone’s here.
(via Inside ETFs)
My top 5 takeaways:
1. Fee War Officially Over. Falling ETF fees have been a hot topic since Inside ETFs began over a decade ago. In literally the first hour of this year’s conference, I heard “A single digit expense ratio is the new 5-star”, “Lowering fees is batting 1.000 in attracting investor dollars”, and “Self-amputation (lowering fees) is the best strategy for ETF providers”. It seemed like 2019’s edition of Inside ETFs was heading towards more of the same. I was wrong. From that point on, ETF providers struck a tone of defiance. They’re drawing a line in the sand and starting to push back. Financial Times editor Robin Wigglesworth posed this to State Street’s Rory Tobin: “Is the right price for simple beta zero?” Rory’s response? “The right price for anything you value would never be zero”. In conversations I had throughout the conference, it’s crystal clear ETF providers are shifting from a focus on fees to a focus on value provided. The fee war is over. Investors have won. If you’d like, you can build a well-diversified portfolio for the cost of a cup of coffee…
— Eric Balchunas (@EricBalchunas) February 11, 2019
My sense is the majority of companies offering plain-vanilla ETFs simply don’t have much room to drop fees any further. Sure, some will still jockey for position by shaving a basis point here and there. Someone will offer a zero fee ETF (my $$$ is still on JPMorgan or Schwab). But when we’re at a point where investors are wondering why their fund is so cheap and what the catch is, we’re done here. There are only so many levers fund companies can pull. During the conference, both Schwab and Fidelity announced the expansion of their commission-free ETF trading platforms and this pretty well summed-up the reaction:
As explicit, measurable costs go lower (fees, commissions, etc.), investors need to pay more attention to implicit/opportunity costs. Nothing is free, not trades, not funds. Foregone yield on cash is the first place investors should look to gauge the cost of “free”. #InsideETFs
— Ben Johnson, CFA (@MstarETFUS) February 12, 2019
We all agree lower costs are better than higher costs, but nobody cares about a move from 0.04% to 0.03% in fees or saving a few bucks on a trade. An ETF’s exposure and portfolio fit is significantly more important. Battles will still be fought over more expensive segments of the market, but the low-cost beta fee war is over.
2. Active ETFs Move Center Stage. The time for active ETFs has finally arrived. The annual running joke in the ETF industry is that THIS is the year for active ETFs. Well, THIS IS the year. Seriously. The low cost, plain-vanilla exposure is all spoken for and as I just explained, the fee war is over. Smart beta and factor ETFs? I follow ETFs for a living and can barely keep my head from spinning. ETF providers are realizing that if they want to provide value – and IF they believe in active management – active ETFs offer a better delivery vehicle. Forget the tired active/passive debate. For as long as markets exists, there will always be investors chasing outperformance. You don’t have to agree with it, but it’s true. There was a noticeable conference presence from old guard mutual fund companies, who are finally getting serious about ETFs. Legg Mason stood out, but there were plenty of others with a strong presence or sniffing around the event. Many of these companies have watched investors yank money from their actively managed mutual funds and plunk it into ETFs. Only a bull market has kept their business models intact. Whether it’s the prospect of a market downturn, prudent business sense, or divine intervention, they’re FINALLY seeing the light. If Inside ETFs is any indication, expect active ETFs to become the industry’s fastest-growing segment.
3. Bitcoin & Marijuana ETFs Exit Stage Left. Speaking of center stage, nothing stole the spotlight at last year’s Inside ETFs more than bitcoin and marijuana ETFs. This year, that buzz was completely gone. There was one panel discussion on each topic and that was it. For bitcoin, a rough 80%+ price drop hasn’t helped. Add in regulatory hurdles and a government shutdown, and it’s tough to envision a bitcoin ETF anytime soon. For marijuana ETFs, regulatory concerns are an issue as well. That said, in several chats I had with those in the know, it sounds like more marijuana ETFs are on the way – probably sooner, rather than later. While regulatory concerns remain, the only pure-play marijuana ETF (ETFMG Alternative Harvest ETF, ticker MJ) recently surpassed $1 billion in assets. Given that MJ doesn’t seem faced with closure risk, the door appears open for competitors. With a little ingenuity from ETF providers with pot filings currently in the hopper at the SEC, marijuana ETFs will likely reenter stage right in 2019. Bitcoin ETFs? Exhale. It’ll be awhile.
4. ESG ETFs Still Receiving Attention and Still… Nothing. I’m continually amazed at the amount of coverage ESG receives. Let me be clear. Just about all of us want ALL companies to do the right things. Whether environmentally, socially, corporate governance – I think most people expect companies to make an honest effort at trying to advance (or at least be mindful of) society while pursuing profits. But trying to package that into an ETF is like trying to package everyone’s interpretation of the meaning of life into an ETF. Good luck. I will say that famed investor Paul Tudor Jones gave an excellent presentation on socially responsible investing and the ESG-focused ETF his firm, Just Capital, is powering (Goldman Sachs JUST U.S. Large Cap Equity ETF, ticker JUST). His bottom-line case for investing in JUST was “Do good, feel good, & make money doing it”. Sounds great and ESG ETFs need more messengers like Paul. But immediately, his performance data was called into question…
here is the full sample using our flavor of factors on ~r1k universe.
size = mkt cap l/s, value = ebit/tev l/s , mom = 2/12 l/s, quality = mix of roa/fs score
6bps “unexplained” or “alpha”. Far cry from 1.5%.
alpha is in the eye of the regression pic.twitter.com/kORJx8tOm4
— Wes Gray 🇺🇸 (@alphaarchitect) February 11, 2019
Therein lies the multiple problems for ESG. What are the “right things”? Who should decide what the right things are? Assuming you and the fund company agree on the right things, will the investment performance be there? Can you make a difference owning or not owning a small fraction of a company’s shares in your retirement account? Are you better off donating money directly to causes you champion? Why not just stop buying companies’ products or services and help facilitate their demise? Isn’t the market the ultimate arbiter of which companies are doing the right things over the long-run? If not, why do those companies stay in business? I could go on and on. I don’t have all the answers here, but my takeaway from the conference was… neither do the ETF providers.
5. ETF Education Still Lacking. I’m on the fringe of what’s called “Fintwit”, the subculture of finance/investment Twitter. However, I am close enough to be dangerous. I know who the players are. I had the pleasure of briefly chatting with one of those players, Sarah Newton. Sarah is an individual trader (highly recommend listening to her story). Our conversation lasted all of five minutes, but it left an impression on me. I asked for her thoughts on the conference. Her response? Us ETF geeks operate in an echo chamber. The ETF industry needs to do a better job of bringing our message to everyday investors. Which brings us full circle. The fact that the conference itself has moved mainstream and is no longer occupied only by ETF geeks is a positive. That the Sarah Newtons of the world are taking interest leaves me more excited than ever about where ETFs are heading. You see, what started as a small cult (remember cool, not geek), grew into a real movement, and is now moving mainstream. But Sarah is right. The challenge – and opportunity – for all of us close to the industry is to now bring our message to ALL investors. A message of lower costs, transparency, tax efficiency, trading flexibility, innovation, and striving for better investor outcomes. ETFs have democratized investing, but they haven’t democratized financial and ETF literacy. It’s our job to change that.