Active ETF Revenues Surpass 6%

Feb 14, 2020 7:17:00 AM / by Toroso Investments

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ETF Think Tank KPI Report

US ETF Asset Growth

Market sentiment is generally positive, and it is clear that the ETF evolution will gather trillions of dollars much faster than in the last decade. Having said that, Assets Under Management in January closed at $4.44 trillion - flat from year-end December 31, 2019.    

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Florida was Infested with ANTs (Active Non-Transparent ETFs)

Feb 6, 2020 7:37:00 AM / by Toroso Investments

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The ETF Think Tank team just returned from a week in South Florida after attending #InsideETFs and visiting multiple family offices to promote ETF education. Usually, we do a recap of the event, but this time we want to focus on a subject that permeated many of the panels and our discussions with family offices: Active Non-Transparent ETFs or “ANTs.” 

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ESG’s Growth: The SMART BETA on the Benefits of Transparency

Jan 23, 2020 7:00:00 AM / by Toroso Investments

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Bring your own assets “BYOA” and help define an ETF category? ESG AUM topped $16.145 billion in 2019, up from $5.817 billion in 2018 and just $2.982 billion in 2017. As a sponsor, Blackrock ­­iShares leads the category with $9.2 billion or 60% of the AUM. However, the category now has 65 choices with the top 10 and 20 ETFs representing 77% and 88% of the AUM. This is an exciting trend in the ETF market because, unlike many ETF categories, this trend has the potential to expand choices across asset classes. And yes, factors play a “smart” role in driving “alpha”, but the definition of principal and principles has an equally significant role. For this reason, it is possible that the number of choices in this category may grow exponentially over the next decade, but investors will really need to look under the hood to make sure that their principal and principles are properly aligned with their personal mission. (See ETF Edge Report for further insights about the debate around purity of process.)  

  • The evolution of ESG ETFs will be defined by transparency of decision making around principles
  • Portfolio Access may redefine the “A or a” in SMART BETa
  • Education around the definition remains in the early stages

BYOA, Define a Philosophy and Inspire Investors by Example

I don’t know the story behind the decision made by Ilmarinen, the $10 billion Finnish pension firm, that seeded two ETFs with $3 billion in 2019, but I would encourage people to visit their website to understand why they did what they did. Simply put, a pension fund, with the responsibility of managing 600,000 people’s retirement money, made the decision to put their money where their mouth was by empowering capital that aligned with their stated mission

The website states:

“Ilmarinen’s strategy for 2019–2021 highlights responsibility, customer focus and personnel experience. Our basic task is to ensure the earnings-related pension cover of our customers. We want to be the most attractive working life partner – responsibly, for you.

In the strategy, our long-term goals are to be one of Finland’s best places to work, offer the best customer experience in the sector and grow profitably and faster than the market. In terms of the ratio of operating expenses to expense loading components and solvency, our goal is to be better than the sector average.

To reach our goals, we will succeed together and boldly reinvent ourselves, we will operate with a focus on customers and promote work ability, grow profitably together with our customers, digitalize customer paths and processes and invest profitably, securely and responsibly.

To achieve our goals, we operate in line with our values: openness, responsibility and co-operation.”



Leading by example and committed capital, I think this institution is stepping up and educating all of us on what they see as “right”. However, that does not mean that ESG has been defined or is consistent with other investor’s definitions. In fact, investors may find the methodology confusing and different from what they think the literal definition is. Neverthless, this is a natural extension of the evolution of the benefits inherent in the transparent nature of the ETF wrapper. Ironically, this could be part of the AUM solution for “Semi-Transparent ETFs” and the direction of how the ETF wrapper, as a technology,  could lead to asset management disruption.

The Ironic Opportunity for Semi-Transparent ETFs

The Semi-Transparent or Non-Transparent ETF wrapper could benefit from other pension and/or insurance companies bringing their own AUM (BYOA) and making statements when they sell a company.  The decision to sell stock because the company is no longer meeting a specific philosophical standard makes a large statement to millions of holders of that pension or insurance company. 

With some irony about the definition of SMART BETa I think this could be part of the evolution of a new meaning of SMART BETa. Rather than SMART BETa being defined by a “Smart Bet on alpha,” enterprises may take it  to a new level and define it as “Companies, if you want access to our capital, be aligned with our mission and philosophy.”   (WOW – talk about confusion!!!)

The statement made by the Ilmarin pension is meaningful in the context of their 13-F disclosed holdings, as these two ETFs represent their largest position. Splitting the two holdings up between two different issuers also makes sense since it may have helped on the fee. I suspect that the fee was less of an issue, but from a fiduciary standpoint it is clear that Deutsche Bank’s fee at 10 Bps is the same as the SPY, 5 Bps and 5 to 10 Bps less than the two iShares ETFs (SUSL and DSI). The holdings overlapping between the two ETFs is 100%, but the weighting methodology slightly differs across the 320 stocks, which may lead to some dispersion and slight diversification of returns.  Again, while skeptics may wonder why certain companies are owned, looking deeper under the hood may expose the more interesting fact about what is NOT owned. The universe of choice could have begun with benchmarks like Vanguard Total Stock Market (VTI with 1,592 stocks) S&P 500 (SPY/IVV/VO with 506 stocks), the iShares MSCI KLD 400 Social ETF (402).  

The Deutsche Xtracker ETF (USSG) was launched on May 10, 2019 and from a performance standpoint is off to a slow start versus the iShares ETF (SUSL). But regardless, alpha was generated over similar large cap or S&P type ETFs, and more importantly, the “A or a” in SMART BETa has helped to break new ground in providing access for investors to their cultural philosophy of investing. Thank you, Finnish people, for your leadership. With your transparent mission, ESG will grow and social activism will flourish.

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Our 2019 year-end ETF industry KPIs report

Jan 15, 2020 10:00:00 AM / by Toroso Investments

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U.S. ETF Asset Growth

In 2019, the year-to-date 31% U.S. ETF AUM growth rate symbolically came close to matching the index performance of the S&P 500 index (technically 30.67% vs. 31.49%). What a fitting way to conclude the last decade of evolutionary growth in the ETF industry. Investors have clearly bought into the evolution which, at the conclusion of the year also surprised many with inflows into fixed income at $135.4 billion exceeding $130.2 billion in equities. Aggregate inflows totaled $326.3 billion, second only to the $476.1 billion in 2017.

 

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Our 2019 Recap: Everything is Up!

Dec 31, 2019 8:00:00 AM / by Toroso Investments

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2019: Everything is Up!!!

For the advisors and investors in the ETF Think Tank, 2019 was generally a prosperous year. We experienced equity markets returning 20% to 30%, commodities and crypto currencies having upside volatility, and even fixed income rallying across the board.

2020: Our First Webinar 

In our final ETF Think Tank research note of 2019, we chose to focus on fixed income, with a concept we will be covering on a webinar in mid-January: Are Bond Benchmarks Bad?

 

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Answer to the ultimate question of life, the universe, and everything

Dec 18, 2019 9:00:00 AM / by Toroso Investments

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42 ETFs Hit the Road

This week, we geeked out when our nickname went mainstream as @scarletfu dubbed @Ericbalchunas their "Bloomberg ETF Nerd" on ETFIQ. And we get extra nerdy by paying homage to the number 42, as in the number of ETFs Invesco is shutting down and The Hitchhiker’s Guide to the Galaxy

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ETF revenues are at an all-time high

Dec 11, 2019 7:00:00 AM / by Toroso Investments

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Stable Open Close Closings

As of December 2nd, there are currently 2,310 ETFs listed in the U.S., only 3 more than last month. The 12-month trailing number of new launches is 239, down from 264 since the July 2019 report. A declining number indicates that investor choice and ETF innovation may be slowing. The number of closures was 159, resulting in an open-to-close ratio of 1.50 (239/159).  

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Could innovation be the key to capturing assets

Dec 4, 2019 7:30:00 AM / by Toroso Investments

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Show Me the Money

The ETF Think Tank was founded because of our belief in the value of innovation. We have often discussed that the continued growth of ETFs can be attributed to two primary factors: client alignment and innovation. Each factor is defined by certain characteristics.

Client Alignment = Tax efficiency, Transparency, Liquidity, Lower cost

Innovation = Access, Leverage, etc.

We were inspired to revisit innovation based on the chart below which was presented on Twitter by fellow ETF Nerd Nate Geraci. And as we analyzed the revenue vs. AUM of the top ETF issuers, we were happy to see that innovation could be the key to helping lesser known ETF issuers capture more assets.

 

The Big 3

The innovation phenomenon is less present in the 3 largest ETF issuers (the “Big 3”), which appear to garner the bulk of their success from being the first to offer liquidity and low cost. Although, it is fair to say that 20 years ago these client alignment factors were innovations. 

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Can we have transparency with benefits?

Nov 21, 2019 8:00:00 AM / by Toroso Investments

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What is the client experience like, and how can having an ETF strategy help?

As we approach Thanksgiving and consider ways to express our gratitude, we are reminded by the wealth advisors we serve, and how focusing on the client experience is a form of gratitude that goes beyond gifts or special events. Providing clients with a great experience can be as simple as delivering the expected investment outcome. For many clients, that is the gift.

Taking it a step further, we will use the iShares Risk Allocation ETFs. As of November 15, 2019, year-to-date performance numbers of the iShares Aggressive ETf (ticker: AOA) is up 18.93%, the iShares Moderate Risk ETF (ticker: AOM) is up 13.49% and the iShares Conservative ETF (ticker: AOK) is up 12.18%. Given the negative headlines at the end of 2018, we see this outcome is much better than what the analysts forecasted and probably ahead of what most wealth advisors planned to return in 2019.

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The Importance of Having an ETF Strategy

Nov 13, 2019 8:00:00 AM / by Toroso Investments

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Records in October

October closed the month with a couple of ETF surprises. First, let’s focus on the obvious two KPI records: AUM closed the month at a record month end value of $4,152 trillion and second, the number of ETFs now trading is 2,307; despite an open close ratio of 1.62. The third record was reached when the AUM in the $461 billion Global Sector ETF Category, which now is led by the $78.5 Billion Global REIT Sector became the largest sector group. This eclipsed the $77.5 Billion Global Technology Sector. There are 505 sector ETF choices that make up this category that represents about 22% (505/2,307) of the total number of ETFs. AUM concentration means that AUM market share ($461/$4,152) is roughly half, at 11%. Of course, from a KPI perspective, this means hundreds of innovative ETFs are still looking for commercial success. Having more choice, is better from our perspective as portfolio managers.

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