From the beginning of my time blogging I have opined here and elsewhere that ETFs (more correctly exchange traded products) will be a means by which portfolio construction and management can be democratized in such a way that effective and efficient portfolios that don't rely on stock picking would be available to anyone inclined to spend the time.While this observation was/is rather obvious it is still important.
The way things have evolved, most of the products that now exist have come during the double bear market of the oughts. Bear markets are a tough time to start a business let alone an industry.
As new funds have come out my take has been throw anything at the wall and let market participants determine what sticks. That type of business model assumes a certain amount of risk as listing and maintaining a fund costs money. In a bear market certain fund ideas will simply be more difficult to sell. Some funds have been shut and some entire product lines have been shutdown due to an inability to attract assets.
The closed funds that come to mind as I write this never held much appeal to me but maybe to at least a few folks...or not. So the concern is that some potentially very useful funds will end up getting shuttered which becomes a big negative for everyone.
WisdomeTree offers a lot of funds with unique exposure that I think are very useful but they also have funds that I know I will never be interested in. As I count on their site (so I may have mis-counted) I see 50 funds. According to the website the ETF AUM as of December 31 was $3.2 billion and the company lost money. WisdomTree obviously needs more AUM to be profitable. No company can lose money forever but it would be a big step back if these funds closed. I don't know anything and I am not spreading a rumor I am simply saying that their funds are important, they are losing money and it would impede my practice, I'm sure adversely affect other investors and obviously the employees.
There is an ETF company called EGA Emerging Global Shares that has not listed any funds yet but their big thing will be emerging market sector ETFs. As a person who builds portfolios at the sector level I obviously think this will be very important, probably not every sector mind you, but I think these will be very important collectively. Just because I believe this does not mean that the line has to succeed. Emerging market sectors is innovative and unique as opposed to a slightly different mix of domestic large cap stocks and anytime that innovative and unique fails it is a step back for everyone. I should mention that a friend of mine, Richard Kang, is part of the brain trust at EGA Global but I have no affiliation with the company.
The idea stated above of effective and efficient means being able to access all parts of the market via ETPs. The progress made has been good and once the financials crisis is over (it will end one day) then the remaining ETNs will go back to being a long shot for default the marketplace for ETPs will be a little wider and there will be more innovation that comes to market and will succeed at attracting assets. We will all be better off for this.
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13 comments:
As a retiree, I had very high hopes for Wisdom Tree. Their approach to structuring etfs based on dividends and earnings made sense for my situation, the backtests were strong, and I admired Siegal. I used two of their funds but exited them after very poor performance.
I noticed recently that they're restructuring some of their products to exclude financial stocks. I hate to see them compromise, but I suspect the current financial calamity has dealt a body blow to their assets and called their fundamental premise into question. I wouldn't be surprised to see someone acquire Wisdom Tree before this is all over.
Speculation is almost always doomed to failure. You all should be concentrating on investing for the long haul. These products you wring you hands about are for speculators. The massive turnover can only lead to excessive costs. The ETF firms were probably eating those cost hoping that things would improve...well they won't. I predict the only solid ETFs to survive are those from no-nonsense firms like Vanguard that have the economy of scale to spread the costs over many shares. This is what happens when speculators actually try to run a business.
As a farmer, I don't speculate in corn futures to earn a living, I actually grow a crop. Use this as a metaphor for speculators versus investors.
What is an ETP?
i defined it (not effectively?) up above; exchange traded product.
Am I missing something? Why is AUM only listed in a note at the top of this page (as opposed to being one of the ETFs listed), and doesn't show up as a ticker symbol on Yahoo or Google Finance?
SD, you lost me. AUM is assets under management. Are we talking about the same thing?
I liked the Wisdom Tree idea but not top management: Jonathan Steinberg et all simply inspired no confidence so I never invested.
This is off topic I know, but I've been trying to find a quote from the great depression era, I think in reference to the second major decline in 1933.
Paraphrased the quote went rather roughly like this: "The fools and speculators were killed first, the smart ones were killed later."
Anyone got a source for a quote expressing sentiments (something) like that?
Meant 1931 rather than 1933 in my previous comment.
Sorry - that clears it up. I didn't know AUM mean that, and I thought it was a ticker.
Any ETFs with a mechanical investing method? Say use points targets on the S&P (600 - fully invested, 1600 - all in cash) or something like that?
Just looking for more choice in Index investments. Seems simple enough, so an account manager doesn't have to make too many decisions, and the customer can't have any emotion getting into their decisions. Buyer beware 100% at the outset.
This is off topic I know, but I've been trying to find a quote from the great depression era, I think in reference to the second major decline in 1933.
Paraphrased the quote went rather roughly like this: "The fools and speculators were killed first, the smart ones were killed later."
Anyone got a source for a quote expressing sentiments (something) like that?Have you been eating your spinach and reading your Hussman? :)
http://www.hussmanfunds.com/wmc/wmc090209.htm
Among the factors that kept us from becoming overly constructive as the market lost half its value over the past year is a 1932 quote from Edwin LeFevre, who observed about the Depression-era market plunge: “Reckless fools lost first because they deserved to lose, and careful, wise men lost later because a world-wide earthquake doesn't ask for personal references.”
RW, what do your instincts tell you about this time? Is this a repeat of a once in generation world-wide earthquake or has the worst past with just minor follow-on tremors?
Mike C: Many thanks, I knew I had seen that quote somewhere but couldn't put my finger on it. I tend to pay more attention to the numbers, at least consciously, but the fact that that quote has been circulating in my head suggests my unconscious or hind-brain is feeling very wary.
On the topic of quotes, J.K. Galbraith's, "One of the greatest pieces of economic wisdom is to know what you don't know," has made the rounds although it's actually a paradox* pretty much describes my current state of mind overall: Conflicted. Unlike Y2K, which I knew was real because I worked in a related field; it’s harder to separate the wheat from the chaff amidst all the complexity in the current case.
I did make some strategic adjustments a few months back based strictly on more reasonable market valuation levels, basically extending long exposure 9-10%. I tweak a little here and there as I indicated last time we spoke but longer-term macro-economic indicators continue to teeter-totter and technical market behavior – what Hussman refers to as internals – doesn’t indicate improving sponsorship or broad participation so cash and short duration, high quality foreign and domestic bonds remain at high levels as do some hedges.
Shorter: Almost all my investment activity remains shorter-term and tactical because that remains my only clear option until a less equivocal trend emerges. It’s a tough time for long-term strategic allocation models and those whose discipline provides limited alternatives.
ISTR making a remark to our host when he started this blog that, as an individual investor, I have no benchmarks other than a net increase in wealth (total real return, risk adjusted) and my own satisfaction but that is generally not the case for professional money managers who may be constrained tactically by mandate yet are none-the-less confronted by some market-based benchmark that typically has no such limitation(s).
*Note: I've always been more fond of the Anonymous quote, “You don't know what you don't know, If you don't know what you don't know” because it accentuates the paradox: How can you even imagine something if you do not, at some level, already know it?
Regarding ETFs, I expect to see consolidation among the newer companies like WisdomTree, Powershares, etc. Even Barclay's has talked about selling the iShares brand. So I expect to see funds start to consolidate. But, the ETF revolution is happening. It is a vastly superior offering to mutual funds and close end funds so I expect them to take the lead over time.
Regarding the investing environment, I believe that we won't see a truly sustainable bull until we deal with the underlying problem of too much debt. We have $50 Trillion in debt compared to an economy of $14 Trillion. It can't go on liked this. At the peak of the Depression, it was at 250% of GDP. We are well above that now at 350%. I could be wrong, but I feel the market is trying to tell us to lower our debt load.
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