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Heard At Inside ETFs: Monday

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On the first full day of the Inside ETFs conference, ETF.com staff were tasked with selecting some of the more insightful statements and observations they heard.

For Managing Editor Cinthia Murphy, active management and fixed income were the hot topics:

  • It’s been a while since just about everyone in the ETF business—from issuers to advisors to investors—seemed to focus on one topic. On Monday, the talk of the day on the sidelines of the conference is the imminent takeoff of actively managed ETFs once the semitransparent wrappers arrive. The idea is that this cloaked portfolio option will bring a whole new group of investors to ETF space. We’ve been waiting for active ETFs to take off for nearly two decades. They currently represent only about 2% of all ETF assets in the U.S., failing to find much traction outside the fixed income space. But we are all eager to see if a new structure is the catalyst active management has been waiting for to truly carve inroads into this industry.
  • Fixed income ETFs had a phenomenal year last year, attracting more assets than equity ETFs in the U.S. for the first time. But, in reality, there were no bad parts to the market in 2019. Consider this: “All 80 Vanguard ETFs had positive returns last year, all of them,” Rich Powers, head of ETF product management at Vanguard told us. Years like that when every strategy is a winner don’t come around often, but they sure are fun to witness!

Editor In Chief Drew Voros sat down for a chat with Jan Van Eck, the CEO of ETF issuer VanEck, who told him:

“Because asset classes and segments of the world fall in and out of favor, an ETF issuer needs to have a diversified lineup across all asset classes and all parts of the world to succeed.”

Meanwhile, Staff Writer Sumit Roy moderated a panel on emerging markets in the afternoon and had several key takeaways:

The panelists broadly agreed that despite underperforming for several years, stocks of developing countries were poised to make a comeback and outperform the U.S. going forward.

Valuations are much cheaper for emerging market stocks than their U.S. counterparts, they argued. However, emerging markets aren’t a monolithic block with identical fundamentals. The panelists disagreed with whether it was worth buying Chinese stocks today.

Three of the panelists were bullish on the country, while one opined that Chinese citizens’ lack of personal freedoms hindered its long-term outlook. The Alpha Architect Freedom 100 Emerging Market ETF (FRDM) has zero China exposure for this reason.

Meanwhile, the China bulls were especially bullish on Chinese internet companies. The Emerging Markets Internet & Ecommerce ETF (EMQQ) was a favored name in that space. Outside of China, other counties that were mentioned as worthy of consideration include Russia, Brazil, and Chile.

Staff Writer Lara Crigger had a couple of notes after a wide range of conversations:

  • According to the latest numbers that ETF market guru Deborah Fuhr has run, ETF assets have massed twice the amount of assets under management as hedge funds.
  • Everybody wants to talk non/semi-transparent active ETFs. They’re THE hot topic of the conference, the same way that ESG or smart beta were in years past. But the prevailing tone is one of skepticism. One well-known market watcher brought up a host of potential problems that newcomers like T. Rowe or American Century would face, from a lack of internal infrastructure to support ETF trading to a lack of financial incentive to support their ETF products, based on revenues. “Nobody’s thought of the downstream,” he said.

Managing Editor Heather Bell sat in on a few sessions:

  • “It’s very easy to pick the cheapest ETF that has the factor you want in its name and stop there,” said CFRA’s Todd Rosenbluth during a factor-focused panel. But if you do that, you could find yourself disappointed, he warned, urging investors to look beyond the expense ratio when evaluating ETFs.
  • On the stage in the Exhibit Hall, Phil Bak of Exponential ETFs, cited a number of statistics about the largest securities. He pointed out the five largest U.S. companies represent more than 18% of the U.S. stock market and 10% of the global stock market. Bak went on to note that a 40-year study indicates that the stocks with the largest market capitalizations tend to offer lower returns. He suggested his firm’s Reverse Cap Weighted U.S. Large Cap ETF (RVRS) as a way around this issue.

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