In his post Matt talks about seeing a few funds in the filings that could become very important but doesn't say which ones. He also mentions big firms that are not yet in the business, like Schwab, getting in and staking a big claim. There are many S&P 500 index traditional mutual fund so there can be more than a couple of SPX ETFs.
The other point he made that stuck out to me was some ETFs being targeted to investors while others are targeted at traders. Interestingly there was no mention of actively managed ETFs (I think actively managed ETFs are huge so what).
I would add that by 2014 we will have flying cars and be eating all our meals in pill form. Ahem.
The biggest thing may not be ETFs but what gets done with them. One of the great things about them (and I am surprised how few people touch on this) is that because they are indexes mostly (even the narrow based ones) you know what you will own six months from now. Not so with actively managed products. This makes integrating them into a portfolio seeking specific effects is easy to do. If BP and Total (TOT) are the two largest stocks in your energy ETF today, chances are they still will be six months from now.
Given the potential utility this offers I think we will see products the bundle ETFs together in search of some other effect. Maybe this means long short or customized pairings like something that is 75% materials ETF and 25% one materials stock or anything else. Maybe they would be called Alpha Bundles or Core (the narrow ETF) & Explores (the stock). These would allow brokerage firms to market research ideas into investable products that are less risky than just buying the stock.
To be clear I'm not saying these will be good things, should they come, but they would be a way for brokerage firms to stay relevant and offer more than SPY/IWM/EFA combos to people.
I imagine there will be more country funds (GlobalX has an Egypt fund in the works), currency funds (WisdomTree filed for just about every currency but I have given up on them actually listing them) and a lot needs to happen with fixed income ETFs. Matt mentioned that he thinks the PIMCO TIPS funds (there is three of them now) will turn out to be important. ETFs bring more to the table than a lot of people realize,a t least for now. More market participants will see the real value and make more effective use of them.
11 comments:
I am also glad to see more ETFs, but many will not make it even if they do well. So I am going to make sure that any ETFs that have a small market are in tax free accounts so if a forced sale comes it is not a taxable event. Furthermore since I see another crisis coming eventually ETNs should not be purchased.
Love the idea of Alpha Bundles!
Etfs that smooth out the ride by bundling uncorrelated assets would be helpful. Maybe gold and commodities with stocks?
I'd love to see Mixed Fixed etfs--say MLPs, reits, and bonds bundled together.
I'm afraid we're entering a period of over-regulation which is going to hinder true innovation.
I love the idea of more ETFs, but a bit of a skeptical note for the ETF industry. I have noticed that the narrower products and bundles of ETFs tend to have fairly high expense ratios. Recommendations: dividend paying (monthly preferred, but quarterly at a minimum) bond and currency ETFs with low expense ratios would be attractive additions.
JCarr
Probably couldn't create an ETF to deep-tap global carry trade unless it was semi-actively managed; pairings would be too unstable. DBC takes a stab at it using major currency pairings but ZIRP in Japan and the US is really skewing action: If major players can buy Yen or USD for virtually nothing and use that to buy everything else, well, why not. The cash flow is as close to guaranteed as you can get short of just holding a long t-bond to maturity.
If it weren't for ZIRP in two of the worlds biggest currencies and some really big bailouts of banks that have no reputation for prudence it would be genuinely puzzling to see Equities, Gold, Treasuries, basically the whole sh*t-shebang, all go up at once. This could be interpreted as stage two of a bull market on technical strength alone with conflicting opinions of market players proving one set of players wrong before too much longer; e.g., http://tinyurl.com/nw6fya
OTOH one could view this as another carry-trade, liquidity bubble and continue playing the increasingly broad (but still relatively unsponsored) run-up in assets tactically, using appropriate leverage, hedges and position sizing, with fast cut out when the music stops: Somewhat busier action but less worry about asset selection as long as assets are highly liquid; much easier to get out with more skin intact. YMMD
Not going to see an ETF created for 'strange times' probably, even if those times become something more like the new norm, but its rather interesting to speculate on what it would have to look like. The BSD's would rather not see too many "hedge funds for the masses" I'm sure -- could complicate the easy play those with the right connections and leverage have had for a very long time -- but so much risk has been shifted to the middle class (e.g., http://tinyurl.com/lumpe7) it seems at least moderately likely that concessions will be made on that front.
Interesting times. With a little luck, the next wave of innovation won't be quite as 'interesting' as the last wave; e.g., based on their derivative portfolios alone (CDO, CDS, SIV, etc) I'd still bet even money that most of the major global banks are insolvent.
Perhaps we need a "government option" to keep greedy ETF sponsors in line.
How could any of the banks be insolvent? All of the problems are off balance sheet!
RW I think you mean DBV instead of DBC.
I've thought for the last year or so that DBV is one of the most interesting ETFs out there. That has a chart that looks exactly like S&P 500. (sad trombone sound)
Wonder why?
ETFs were originally designed as index funds because Bogle investing was all the rage. But now that the broad US indexes have proven to be poor investments, I don't think there's much future in creating more S&P 500 funds.
Instead, we need more access to smaller niche markets. I can't buy any Sri Lankan stocks, for example, but I'd like to, and would certainly buy a basket of them if offered.
JCarr: OF COURSE small niche markets that can only sell small amounts of equity will be more expensive in terms of trading costs. That's no reason to complain. I'd rather have a 20% gain minus a 2% expense ratio than a 2% gain minus a 0.2% expense ratio, wouldn't you?
Anon 11:49, you're right, I meant DBV. I agree it's an interesting fund, and a harbinger of other funds probing the boundaries of carry and/or currency market strategy IMO, but it does seem to be echoing the S&P to some degree at least when you eyeball the chart; more stable of course, no huge March downdraft for e.g., but I haven't analyzed it in any detail so I'm not sure how strong the correlation actually is or what could plausibly explain it.
being short JPY and USD hurt DBV a lot.
DBV was short JPY and USD? That certainly explains the fund's relatively poor performance IAC. Two of the world's leading reserve currencies at ZIRP boundary could probably cock up any global allocation strategy if it comes to that though. Been giving me a few headaches that's for sure.
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