ETF Boomtown!

I have a special treat for you today. I’d like to introduce you to the newest member of our Uncommon Wisdom Daily team, Grant Wasylik, and to share with you the first of what will no doubt be many investment insights from this top-notch research analyst.

Grant has worked as a portfolio manager, lead research analyst and head trader for a billion-dollar wealth manager for 10 years. He also spent a few years working in a specialized risk-trading department at a major broker — where he was the first-ever external hire into this elite department. Before coming to Uncommon Wisdom Daily, Grant was the chief analyst and co-editor of The Palm Beach Letter.

Due to his vast investment experience, Grant has a deep contact list of 300-plus mutual fund, ETF, index, hedge fund and other top-notch financial professionals at his fingertips. In addition, he receives special invitations to — and attends — several of the world’s top investment conferences each year.

Below are some of his notes from the world’s largest ETF conference, "Inside ETFs," which just wrapped up here in Florida.

Please join me in welcoming Grant to the team, and be sure to look for more from him in the coming days. And be sure to look for the day’s news highlights at the end of today’s edition, like always.


Grant Wasylik

ETFs are to mutual funds … as iPhones are to rotary phones. And everyone is catching on. Are you?

I attended The World’s Largest ETF Conference — "Inside ETFs" — in Hollywood, Fla., last month. In its ninth year, the conference tallied 2,200 registrants, 120 speakers and 105 sponsors.

Over four days, investment heavyweights gave their views on the markets … and of course, ETFs.

You may recognize some of keynote presenters:

  Jeremy Siegel (The "Wizard of Wharton")

  Jeffrey Gundlach (DoubleLine Capital’s CEO & CIO with $85 billion in assets)

  Bill McNabb (Vanguard’s CEO)

  Kevin O’Leary (Investor on ABC’s Shark Tank)

  Liz Ann Sonders (Charles Schwab’s Chief Investment Strategist)

  Marc Faber (Editor of The Gloom, Boom & Doom Report)

One particular presentation I’ve grown to appreciate — being an attendee for multiple years — is that of Matt Hougan and Dave Nadig. Hougan is the CEO of ETF.com — the event’s host. And Nadig is the Director of ETFs for FactSet, previously serving as the CIO of ETF.com. Their presentation is a perennial update on the ETF industry: the past, the present and the future …

This year’s presentation was titled "What’s Next: The Battle for the Soul of the ETF Revolution." Here’s a summary of what the two ETF experts shared with a full house of captivated attendees …

The Past: 2015 was a record year. 285 new ETFs launched in 2015 (a record) … 23 new ETF issuers entered the market (a record) … and $243 billion of net new money flowed into ETFs (near record).

Growth in the ETF industry has been massive …

ETF Assets Have Soared!

Source: FactSet as of 12/31/15

In fact, since the financial crisis, mutual funds have received $61 billion in assets, while ETFs have received $1.2 trillion.

The Present: There are over 1,800 ETFs in existence. And more than 1,000 new ETFs are in registration with the SEC.

Everyone is entering the game. It’s not just three guys in a garage starting an ETF. All the big players have joined the party because the asset flows just can’t be ignored any longer. Fidelity, Goldman Sachs, Legg Mason, John Hancock, and Principal have all brought ETFs to market.

Today, ETFs are the top investment choice in wealth management. Financial advisers prefer ETFs over all other investment choices …

Which Investment Vehicle Do You

Use/Recommend with Clients?

Source: FPA’s Trends in Investing Surveys

The Future: Mutual funds are a dead man walking. No way should ETFs grow slower than mutual funds over the next five years.

Expect more "smart beta" ETFs (rules-based index construction instead of market-cap weighting), actively managed ETFs and niche ETFs in 2016.

There is, however, one big issue facing ETFs (and mutual funds): regulation.

The SEC is looking at asset classes in fund format that may be too illiquid. And are hurting investors. There is a 428-page proposal that could result in certain types of funds being banned in the near future.

The regulation could be a setback. Either way, Hougan and Nadig believe ETF assets will surpass mutual fund assets in the next seven to 10 years.

What’s all the hoopla surrounding ETFs?

And why are they gaining share?

It boils down to six main reasons:

1. Lower Costs. This is a no-brainer. Take the average expense ratio for large-cap equities: Mutual funds charge 1.37% and ETFs charge 0.44%. Plus, several online brokers (Fidelity, Schwab and TD Ameritrade, for example) have commission-free ETF investing platforms. Yes, that means you can buy and sell ETFs with no commissions.

2. Tax Efficiency. ETFs are more tax-efficient than active or passive mutual funds. Across domestic and international equities, investors get hit with an average tax bite of 3.19% on active mutual funds … 0.45% on passive mutual funds … and 0% on ETFs.

3. Intraday Trading. Mutual funds that trade like stocks. What’s not to like? ETFs represent 25% of all trading volume. The most liquid security in the world is an ETF … the most liquid options in the world are on ETFs … and ETFs have transformed formerly illiquid asset classes like bank loans, high yield and MLPs.

4. Transparency. ETFs offer daily disclosure. Mutual funds do not.

5. Better Performance. Active managers consistently underperform their benchmarks. 80% underperformed in 2015 (it was 85% the two years ago). Even in the categories where active equity managers are supposed to have an edge, they’re failing investors. Last year, 83% of active small-cap managers underperformed their benchmark and 82% of active international managers underperformed their benchmark. Why pay higher fees for active management — mutual funds and hedge funds — that results in underperformance?

6. Access to Anything. With 1,800 ETFs, you can get access to just about every nook and cranny of the markets you could want. Want to short the market? You can buy SH (ProShares Short S&P 500 ETF). Think gold miners are going skyrocket over the short term?

Buy JNUG (Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF). How about a bet on Japanese stocks, but you’d like to limit your yen exposure? Buy DXJ (WisdomTree Japan Hedged Equity ETF). A portfolio of restaurants? Buy BITE (The Restaurant ETF). A basket of airline stocks? Buy JETS (U.S. Global Jets ETF). And so much more …

In a nutshell, you could do much worse than having a diversified portfolio of ETFs …

Each year, Hougan unveils his "World’s Cheapest ETF Portfolio." This simple portfolio consists of six ETFs and six different asset classes. Each ETF is the lowest-cost ETF in its specific asset class. His portfolio provides exposure to approximately 1,300 bonds, 4,000 stocks, 40 countries, 12 currencies and 17 commodities.

It’s the type of a portfolio an institutional firm would have dreamed of having a few years ago. And now, any investor can buy it for an all-in expense ratio of 0.08% (asset-weighted).

Just by constructing — and investing in — a long-term, diversified portfolio of a few cheap ETFs, you’re well ahead of most investors.

Over the next several weeks, I’ll be writing about several ETFs (new and old) that caught my attention at the conference. Stay tuned for more to come.

Best,

Grant Wasylik

***

Thank you, Grant. Afternoon Edition readers, We would love to hear what you thought about this article. Let us know what you think by leaving a comment on our website.

***

Oil surged in early trading to a seven-week high. This was thanks to a report about a pipeline disruption in Iran and Nigeria — one that could take 800,000 barrels of oil per day of oversupply off the markets for at least the next two weeks.

Late in the U.S. trading day, oil reversed its gains. West Texas Intermediate crude closed 0.9% lower, at $32.78. Stocks, which saw early gains, closed mixed for the day but in positive territory for the week.

•  Want to hack an iPhone? Try Play-Doh. Mobile security firm Vkansee posted a video to Twitter showing how one could use a fingerprint from the colorful clay to unlock a phone via Apple’s Touch ID sensor technology.

•  Real GDP grew at a 1% annual rate in Q4. This second estimate from the Economic and Statistics Administration took it up from 0.7%. Many had expected it would be revised down rather than up. This puts full-year GDP growth at 2.4% for both 2015 and 2014.

•  New Jersey governor and former GOP presidential candidate Chris Christie endorsed Donald Trump for president.

•  Kohl’s (KSS) reported a 20% drop in Q4 profit. The retailer plans to shutter 18 stores, which could save the company about $45 million. But don’t look for its exit from the brick-and-mortar business. Kohl’s plans to open outlet stores and smaller stores that re-sell returned merchandise.

•  Uber, Tesla and Amazon are hurting retailers, says Sears Holdings (SHLD) Chairman Eddie Lampert. Companies that don’t have to collect sales tax and/or can raise billions of dollars in capital have a distinct advantage that companies like SHLD, which lost $5.44 a share last quarter, can’t compete with.

•  Deutsche Bank (DB) said it’s time to stock up on gold. But with the yellow metal at its highest price in a year, we asked our resident gold expert, JR Crooks for his take. He said the charts are telling him that gold is due for a breather. So, there may be an opportunity to get in cheaper heading your way.

Good Luck and Happy Investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

Your thoughts on “ETF Boomtown!”

  1. Aloha Brad. Read your column daily. I’m sold on the ETF concept. Saw an article on ETFs that scares me. Is there any way to find out how much an ETF, specifically SPY, is leveraged. I’ve heard rumors that GLD is 100 to 1.

  2. Hi Grant,
    Clearly the way to go , but with so many to chose from, getting good ones , some have had bad press in recent years ?
    Ian

  3. David Stockman claims ETFs are derivatives and present dangers in very volatile markets. You should explain that fact about ETFs and explain whether David Stockman is right or not. I know that when a lot of people liquidate their EFT shares the ETF must sell a proportionate amount of its constituent stocks – the good along with the bad. Thus some good stocks can get excessively punished in such a scenario. Stockman also claims that ETF prices can suffer more than their constituent stocks would warrant in a volatile market leading some holders to sell their shares at and excessive loss. If enough of this happens he feels this could exacerbate a market crash.

  4. Dear Brad: Thanks for sharing this with us. I am a member of your team in, “The Eternum Club”, and your ” The 10- Minute ETF Trader” . We use the ETF’s each month to profit from them. Please note that I can not join any more new programs at this time. I am at capacity and don’t have the capital to keep adding new programs every week. Thanks for understanding. Davis

Comments are closed.

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors.