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Structure Matters More Than Price; Except in the Absence of Value

Posted by Dan Weiskopf, ETF Professor on Jun 3, 2020 8:00:00 AM
Dan Weiskopf, ETF Professor
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Exciting news! The Annual Client Alignment (ACAI) KPI shows that ETF AUM innovation Year To Date (YTD) has accelerated in terms of pure AUM growth from those ETFs launched in 2016 through 2019. This may serve to contradict our Open-Close KPI statistic that sits at a new low of .91, but AUM growth by its nature has survivor bias.  Whether the driver is an outgrowth from BYOA, pure price discovery or simply differentiated opportunities recognized by alpha seeking investors this trend serves to demonstrate that certain ETF investors are starting to look beyond just cost.  See original study for analysis. More information will follow next week, but for now, the evidence of this comes in the form of:

  • As of May 29th, 2020, ETF launches YTD in their aggregate in the years of 2019, 2018, 2017 and 2016 saw YTD increases in value of 45%, 7%, 14% and 30%, respectively. Readers should not assume that all the ETFs have gained market acceptance – this is a broad measure.  
  • Prior years between 2015 through 2011 are negative in terms of AUM, but arguably skewed by weak market performance in 2020 caused by the March lows. We think investors are sure to become less patient with weak performance as volatility picks up.
  • Most interesting, Low Cost Solutions (LCS) like , IEMG, VWO, SCHE and IEFA showed massive declines in AUM value and outflows. As stated in the original “Measuring ETF Innovation” white paper, most of the AUM in LCS success came in the earlier periods of time. Today innovation through LCS must come from how direct to client custodial relations are optimized to reach AUM success, but even with that connectivity there will be tax swapping in this area for sure. Confirming this thesis is the fact that VOO AUM rose by $7 billion, due in part to YTD inflows of $15.8 Billion vs. outflows of $26.8 Billion for SPY and $670 Million in SCHB. Noteworthy, IVV saw $2.7 Billion in YTD inflows.

ACAI Shows a Decline of AUM of $64 Billion vs. $20 Billion AUM from Recent Launches
By isolating the AUM values for launches from 2009 through 2019 we see that AUM is down in aggregate $43.9 Billion as of May 29th 2020, but from the launches in 2016 through 2019 we see AUM increases of $20.6 billion.  Arguably, this is evidence that in the recent 4 year period when innovation has been arguably better targeted as solutions AUM and flows have been more successful. Of course, 5 months is a short period of time.   

Screenshot 2020-06-02 10.21.22

Spank!  Low Vol’s Failure to Deliver Leads to a Decline in AUM in 2020:
Despite all the AUM growth from the years 2009 through 2015 AUM growth has stalled for these launches. The reasons are not always clear; except that the minimum or low volatility factor did not work with the established strategies – specifically SPLV and USMV which were both launched in 2011. Curiously, strategists at the ETF Think Tank often compare SPLV, USMV and a newer solution VSMV (launched in 2017) and find very little overlap in the use of this factor. Time will tell, but clearly we are starting to see a real dispersion on how this factor is assessed.

Structure Matters...and sometimes newer methodologies take into consideration new evidence and changes in market circumstances that fit the construction better.  So often investors forget that past market performance is only as good as an honest back test.  

Screenshot 2020-06-02 10.22.40

Low Cost Solutions Lose Out in Emerging Markets
We hosted a conference call targeting the emerging market on June 2, (replay available upon request). The Emerging Markets Internet and E-Commerce ETF (EMQQ) is a great example of ACAI in that it was a “First” to provide Access to this theme across EM and has delivered huge Alpha over Low Cost Solutions. Launched in 2014, it has AUM of $563 million and captures the broad trend by emerging market consumers in e-commerce.  

There is $150 Billion allocated to Emerging Market Equity ETFs and $129 billion in AUM across “Low Cost Solutions.”  As the chart below illustrates EMQQ has outperformed VWO, IEMG, EEM SCHE and EEMV since inception; the funds that make up the $129 Billion in AUM.  Ironically, SPEM at 11 bps beats VWO at 11 bps and is the lowest cost and the sixth largest ETF in the ETF category.  Does this make $129 Billion in low cost broad market solutions wrong? Why so many investors are penny wise and pound foolish astonishes me, but perhaps this is changing? Outflows in IEMG, VWO, EEM and EEMV YTD have been $4.9 Billion, $3.88 Billion, $4.9 Billion and $851 million. Inflows into EMQQ are $96.89 Million YTD.

 

TETF.Index Performance vs. Select Sector Index


TETFchart

Returns as of May 31, 2020.
Inception Date: April 4, 2017.

Index performance is for informational purposes only and does not represent any ETF. Indexes are unmanaged and one cannot invest directly in an index. Past performance is NOT indicative of future results, which can vary.  

TETF.Index Performance vs. Leading Financial Indexes

Click here for information on the Index following the ETF industry



Topics: Structure Matters

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