Displaying items by tag: ETFs

(New York)

The ETF industry has been undermining the mutual fund business for years, but it is now set to undergo a transformation itself. In particular, as many as half of the 2,000+ ETFs currently listed are likely to close in the next few years as they die off from a lack of assets. Most ETFs need to reach somewhere between $50m and $100m to break even, but currently more than half of the 2,100 or so ETFs have less than $100m. The problem is that the market has become so inundated with new concepts—and so top heavy from broad index funds—that attracting assets is very difficult. Accordingly, many ETFs, including from large providers, are likely to close over the next couple years.

FINSUM: Big names have already started shuttering funds that were underperforming in terms of assets. Expect more of the same.

(New York)

One of the biggest changes in the advisor-oriented ETF market in recent years has been the sharp rise in broker-owned ETFs, such as those from Schwab and Fidelity. Both have jumped to be major players in the ETF market thanks to their ability to sell these funds on their own platforms. One of the important things advisors need to understand is that a lot of new funds are seeded by the provider itself. Some ETFs have hundreds of millions put into them by their sponsors, which means they are not as liquid, or in-demand as they appear. Hartford and John Hancock are examples of this approach.

FINSUM: Brokers deposit huge sums in new ETFs to make them look established and in-demand. The best way to actually double-check that AUM figures are representative of reality is to look at the volume of shares traded, which is much less likely to be misleading and gives a true picture of liquidity.

(New York)

Investors and advisors—don’t get too excited about the zero fee shift among the big brokers, it is not all that it appeared to be. In particular, mutual funds seem to have been entirely left behind in the zero fee shift. Essentially, none of the big brokers has scrapped fees on mutual fund trades. While ETFs are now free to trade, mutual funds in some cases have transaction fees as high as $75.

FINSUM: This is going to wound the mutual fund market further, as not only do mutual funds have higher fees, but trading them will now be commensurately more difficult than ETFs too.

(New York)

Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.

FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.

(New York)

Vanguard is a pretty tough firm to beat in the mutual fund space. Their sterling reputation is hard to top, and no one seems to outdo them in the asset class. However, there may be a viable competitor: boutique manager Dodge & Cox. In fact, the fund manager just got ranked first out of 150 mutual fund companies by Morningstar. The rankings are based “on a variety of factors, including analyst fund ratings, expense ratios, and corporate stewardship”. Perhaps most importantly for investors, almost all Dodge & Cox mutual funds beat their category averages over the last decade.

FINSUM: Dodge & Cox has outperformed Vanguard in many ways, though obviously Vanguard can offer lower costs than anyone else. In many cases, though, performance has been good enough to more than account for the difference in fees.