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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What is the story in today’s market, and what will it be tomorrow?

Nov 5, 2019 5:38:00 PM / by Toroso Investments

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The Federal Reserve has started QE4 with huge injections into repo markets. Regardless of what you call it, upwards of 2 trillion dollars of bonds are due on their balance sheet over the next few years. They will either let their balance sheet unwind significantly or purchase more Treasury debt in some form. This is by no means a “don’t fight the fed” moment. Global QE infusions, if thought of as a boxer throwing punches, are punching with much less force these days. The next important topic is politics. Toroso does not have a political perspective but, as with the Fed, politics drives markets, and will continue to do so for the foreseeable future in the US and globally. The story today is one of uncertainty. There has never been more policy uncertainty in the markets. Making economic judgements based on traditional market data is hard with so much uncertainty, which is why so many current commentaries are talking politics.

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Evaluating Passive Aggressive ETFs

Oct 29, 2019 9:25:28 PM / by Toroso Investments

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The ETF Think Tank was created to provide technology and advice to advisors using ETFs to manage client assets. To that end, we are constantly updating our technology per the feedback of our members and sponsors. Today, we revisit the concept of “Smart Cost,” which we last wrote about in July of 2018.  We will also look at the enhancements to our “ETF Portfolio Builder,” that now allows advisors to see the unique position within an ETFs active share. And finally, we will introduce a new application, sponsored by EMQQ, that helps investors evaluate ETFs focused on the Emerging Markets. 

 

Smart Cost

Although within the ETF Think Tank, we are not fans of the term “Smart Beta,” we do acknowledge the simplicity and intentions of the word “smart.” That is why we created the “Smart Cost Calculator” - to identify the cost of the unique parts of an ETF relative to a benchmark. The origins of this concept stem from a piece we contributed to ETF.com in 2015.

How can investors analyze the “real” cost of smart beta?

We look to identify a static metric, which can be used to evaluate the merits of the alternative index weightings. We accomplish this by identifying the overlap of the smart-beta ETF to the traditional market-cap-weighted index as a benchmark. Then we apply the difference in expense ratio to the unique portion known as the active share or “smart component” in the world of passive indexing.

ETF Think Tank members with access to our application, have the ability to calculate smart cost in a few clicks. For more information or to schedule a demo, please contact: Dan Weiskopf or Kedar Wilson. If you're attending Schwab Impact, look for Dan Weiskopf. He will happily walk through a practical application of how Portfolio Managers build portfolios using this tool. 

As you can see in the chart below, we compared DUSA Davis Select US Equity to SPY S&P 500 ETF and found 86% active share. When the difference in fee is applied to the active difference, we calculate a smart cost of 62 bps. This tells us the cost of the intellectual property the manager has contributed to the ETF and as general rule we believe the smart cost should be equal to or less than the stated expense ratio. 

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ETF Flows are Golden

Oct 16, 2019 11:25:41 AM / by Toroso Investments

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Flows arguably reflect investor decisions and sentiment. Eric Balchunas pointed out on Twitter recently that gold ETF flows are just shy of the $10 Billion record set in 2009 which is a, “notable feat given the increase competition (and attacks) from crypto, as well as the fact that in 2009 gold was up 10% more than this year.” However, according to Bloomberg, even more notable is the fact that gold was up about 30.14% over the previous 2 years when the S&P 500 was down 20.15% (December 31, 2007 to December 31, 2009). Could it be that these flows are telegraphing market sentiment for risk management is changing? Over the past 10 years investors in U.S. equities have been lulled into a form of complacency as a result of exceptional returns and tactical investors have been criticized for missing upside. However, during weak periods of time, such as 12/31/07 to 12/31/10, an allocation to gold helped portfolios. For illustration purposes, we highlight that GLD increased in value 68.23% versus a negative 8.12% for the S&P500 during this period of time.  Meaning that that at times, in the past, tactical decisions towards gold have added value to portfolios, so this change in flows should be monitored closely.  They could be indictive of a change in investor sentiment.  

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Free for All & All for Free

Oct 9, 2019 10:30:00 AM / by Toroso Investments

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The world of investment management is evolving rapidly and driven by advanced technologies and innovation. Last week, commission-free trading of ETFs and equities expanded monumentally with announcements from Charles Schwab, TD Ameritrade, and E*Trade.

etftradefee

Welcome to a world with free ETFs and Index Funds, free Robo-Advisors and free trading.  

Is Free a Bad Thing?

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The “ETF Rule,” like crypto, blockchain and active management, signals more industry innovation

Oct 3, 2019 1:05:36 AM / by Toroso Investments

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We celebrate the SEC’s decision to expedite the launch of  ETFs with its approval of the “ETF Rule” (Rule 6C-11).  Innovation and disruption for the benefit of investors has led the success of the ETF evolution and its growth has been reflected in investors’ transparent ability to save money on both fees and taxes. We expect this decision to make it easier for many smaller issuers to come to market - but getting to market is only a small part of the battle. It is for this reason we focus this week’s commentary on the trajectory of active management and the blockchain.

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What We're Reading Now

Sep 25, 2019 3:26:41 PM / by Toroso Investments

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What's Hot in the ETF Industry

This week, we’ve hand-picked what we believe to be the most impactful news about the ETF industry at large and provide some insights on how you might be affected. Below you'll learn about the impact of ETFs on the Wealth Management Industry, the latest from Kitces, and more.

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A Ridiculous Question on Passive Investing

Sep 17, 2019 1:23:17 PM / by Toroso Investments

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Fear mongering in the financial media

Over the past month, the financial media has once again engaged in ETF fear mongering with a constant barrage of articles about the “passive bubble.”  This renewed focus and blame-game was sparked by a few out of context quotes from Michael Burry in a Bloomberg article:

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