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M* ETF Conference - Quick Reaction - An Overview of Trends Shaping the ETF Market

CharlesCharles
edited September 2014 in Fund Discussions
Ben Johnson, Director of Manager Research at Morningstar, hosted an excellent overview this afternoon on Exchange Traded Fund trends, during a beautiful pre-autumnal day here in Chicago. It's the 5th such conference M* has held.

The overall briefings included Strategic Beta, Active ETFs (like BOND and MINT), and Exchange Traded Fund Managed Portfolios.

We got clearance to share some charts from the Strategic Beta portion, which I also found most interesting and perhaps some of you on the board will too.

Points made by Mr. Johnson:

1. Active vs Passive is a false premise. Many of today's ETFs represent a cross-section of both approaches.

2. "More assets are flowing into passive investment vehicles that are increasingly active in their nature and implementation."

3. Smart beta is a loaded term. "They will not look smart all the time..." and investors need to set expectations accordingly.

4. M* assigns the term "Strategic Beta" to a growing category of indexes and exchange traded products (ETPs) that track them. "These indexes seek to enhance returns or minimize risk relative to traditional market cap weighted benchmarks." They often have tilts, like low volatility value. And are consistently rules-based, transparent, and relatively low-cost.

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5. Strategic Beta subset of ETPs has been explosive in recent years with 374 listed in US as of 2Q14 or 1/4 of all ETPs, while amassing $360M, or 1/5th of ETP AUM. Perhaps more telling is that 31% of new cash flows for ETPs in 2013 went into Strategic Beta products.

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6. Reasons for the growth summarized here:

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These quasi active funds charge a fraction of traditional fees. And, a general disillusionment with active managers is based on recent surveys made by Northern Trust and PowerShares.

M* is attempting to bring more neutral attention to these ETFs, which up to now has been driven by product providers. In doing so, M* hopes to help set expectation management, or ground rules if you will, to better compare these investment alternatives. With ground rules set, they seek to highlight winners and call out losers. And, at the end of the day, help investors "navigate this increasingly complex landscape."

They've started to develop the following taxonomy that is complementary to (but not in place of) existing M* categories.

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Honestly, think this is M* at its best.

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