ETF Conference

It was a pretty easy (direct) flight from Phoenix to Fort Lauderdale and I got in early enough to sit in on a little bit of the ETF 101 panel and the Advanced ETF Workshop and was there long enough to make a couple of interesting observations.

In the ETF 101 panel Matt Hougan made a comment about brokerage firms having 500 analysts following individual stocks but maybe only five analysts focusing on asset allocation with ETFs. Matt can envision this flip-flopping such that in the future there would be far more analysts covering ETF asset allocation as use of individual stocks will be de-emphasized in the future.

I would actually go the other way on this and say that the proliferation of specialized ETFs targeting narrow segments makes stock analysis very important. To use a previous example, anyone buying the Global X Lithium ETF should take the time to learn a little about SQM and one way for a broker at Merrill or Morgan Stanley to do this would be to look at the report from the firm's analyst covering the stock.

If this holds any water then chances are the pay for stock analysts would plummet if, taken to an extreme, their major function is to support ETF portfolio construction. While it is not clear what direction this will take, the turnout at this conference is huge and underscores the growing role the product is playing in all corners of the industry and it is fun to watch it unfold.

From the Advanced ETF Workshop I would focus in on a comment by an audience member. His comment was along the lines of thinking he had begun to understand what ETFs were about but that the panel's discussion made him feel like he didn't know very much at all.

If confusion exists about ETFs I think that it might be attributable to the incorrect way they are portrayed in various segments of the media. Many people seem to think ETFs are an asset class that must be studied to be understood.

This line of thought is not precisely correct and in my opinion muddies the waters. ETFs are not an asset class, they are access to asset classes, access to broad indexes or access to specific niches. The first step should be figuring out what should go into the portfolio (asset classes, broad indexes, specific niches or anything else) via some sort of top down or bottom up process (I prefer top down).

If an investor want to access the water theme they can pick an ETF, an individual stock or a traditional mutual fund (per Google Finance there are a bunch of traditional funds which surprised me). This step of choosing one of the three ways in certainly requires understanding the pros and cons of all three types of vehicles and then picking the best for your circumstance. Presumably the mutual funds in this space are actively managed and that might be appealing. An actively managed water mutual fund is always going to be a proxy for water which makes active management less problematic in terms of portfolio construction-it will always be in this theme. Other people may prefer a volatile stock like some sort of meter company or DGW which is a Chinese company. Another type of stock here could be a high yielding utility. Each of those types of stocks held individually would probably offer a different effect to a portfolio than either type of fund; DGW would probably always be more volatile and a high yielder would probably always yield more than a fund.

It doesn't have to be more complicated than that where the ETF context is funds that track baskets of stocks.

The first picture is of the beach right behind the hotel and the second picture is the view of the game at the Super Bowl party that IndexUniverse threw last night. The TV did not have that line across it as shown in the picture thank goodness.