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Everyone is rolling over and getting into the act. Perhaps a sign of the apocalypse?
I doubt that many of these ETFs, even those from respected shops (such as Harris, but see also Leuthold, First Eagle, FPA, Tweedy, GMO, a sort-of PRWCX ETF) will ever have enough volume to be serious long-term players.
Maybe someone wiser and/or more fin-savvy can explain the phenomenon to me. I like the option of being able to buy the fund directly and roll over distributions into fractional shares. My current broker not only discourages me buying low-volume ETFs, but will only purchase whole shares.
Many firms believe that they can sell their products easier in form of ETFs. Sometime it works in the case of GMO ETFs as @Mitchelg mentioned. American funds are making good progress with their ETFs such as CGDV. Others are slow to attract new asset. We will see how Oakmark ETF fares. The closest equivalent to this ETF would be Oakmark and Oakmark Select funds managed by Bill Nygren and his team.
There's an irony in firms moving to ETFs. When fund supermarkets were taking off, many firms balked at participating. They said that they didn't want to lose information about their investors that they had through direct sales.
Now, by pushing a sales channel (ETFs) that by design must be sold through brokerages, they are supercharging this loss of customer contact.
(That ship sailed long ago, though see, e.g. BRUFX.)
I’ve done a full circle since moving from TRP’s in-house funds to a Fido brokerage. The freedom to own etfs, CEFs & stocks felt great for 2 or 3 years. But the gyrations during the day drove me crazy - though I realize you’re not supposed to look. So, except for one etf at Cambrea where they don’t offer OEFs and a small temporary slice of JAAA (mentioned in another thread) I’ve reverted back to all OEFs.
- You probably pay more for an OEF (a negative).
- There should be less money flowing in and out over shorter periods (a positive unless you like trading).
- Your manager has some discretion when to buy and sell during times of turmoil (a positive)
- Generally, I’d expect an OEF to have a more stable investor base (a positive).
- You’re probably less likely to get jerked around by emotions in an OEF - though it depends on its focus.
Not sure why firms are moving aggressively to etfs. I’d think it’s better for their bottom lines. Or, perhaps a way to attract more AUM in the race for assets? If held outside a tax deferred account they appear to have some tax benefits. The change doesn’t particularly sit well with myself and some older investors … It will be interesting to watch this development when the next 2000 “Tech Wreck” or 2008 “Financial Crisis” comes along. Possibly the rush for the exits and ease of so doing may exacerbate whatever crisis exists.
Did the SEC crackdown on frequent trading in the years following the Tech Wreck of 2000 contribute to the rise / popularity of etfs? Older ones here will recall that trading in OEFs had become excessive - often by organized participants in high quantity. The SEC determined this “skimming” of excess return by such parties by well timed frequent trading was harming smaller more stolid investors who hung on for the longer term. Ironically, one fund firm CEO (Richard Strong) became the center of attention, found to be gaming his own funds - though not the sole perpetrator. Strong was banned for life from the business. Afterward, fund management became much stricter in passing new regulations to prevent frequent trading, enforcing existing rules and blocking trades. Did this all serve to propel etfs to popularity which, of course, can be traded at any time?
A second contributing factor may have been the fhe slow and steady decline of the front-end load structure associated with many OEFs. In the early 70s that load was still very common across the OEF universe, adding to a firm’s bottom line. But investors wised up. With loss of this OEF profit motive, possibly the etf structure became easier or cheaper to operate.
I think the biggest advantage for us is the less frequent capital gains and lower fees. Firms realize they may get left behind, and I assume GMO now has $1 Billion more assets than they did before, as it is unlikely the ETFs cannibalized their high minimum OEFs. For smaller firms that may not be true.
These are challenging times for investment firms which focus on actively managed funds. Index fund (Bogle’s Folly?) usage has increased significantly over the past couple decades. Many investors have also shown a distinct preference for ETFs versus OEFs as Yogi's post illustrates. As a result, multiple companies now offer actively managed ETFs. Other companies are exploring this option in an attempt to gain additional AUM.
I believe there will be an investment firm "shake-out" in the coming years. Firms like Fidelity, T. Rowe Price, Vanguard¹, and Dodge & Cox will do ok. As will some specialized boutiques which offer differentiated investment products. Conversely, many companies with active funds that have above average expenses and middling performance will just disappear. I say bring it on!
¹ manages more than $1.8 trillion in active assets as of August 31, 2024.
Interesting chart Yogi. Thanks. I remain to be sold on the relative merits when considering actively managed funds. Agree that for index investing etfs are a no-brainer. When you have at least a 10-year time frame (preferably longer) to compare performance LCORX vs LCR or FKIQX vs INCM … it might prove enlightening.
ISTM that all the fund companies and brokerages are in the business of attracting assets, above all. I often look at the Parent tab on M* to see if a MF or ETF provider has been experiencing inflows or outflows of AUM. It’s a tough business for some of them. Reporting I’ve read suggests that active trading benefits the brokerages far more than the individual investor; therefore, advertising by the Schwabs and Robinhoods of the world encourages active trading even as their message may be cloaked in homilies to “responsibility” and “custodianship.” On a personal level, active etf trading of a small slice of my portfolio has been far more satisfying and profitable than had been my experience trying to pick individual stocks. I enjoy the challenge and I don’t regret the time spent or the opportunity cost; it’s quite probable that the dough I use trading etfs would have made more profits in SPY, but that’s not the point. I wrecked a shoulder and aggravated my back pain playing energetic tennis, however I fully enjoyed my career competing. Nor do I regret the time spent pursuing the perfect 5-iron shot, one with a slight draw. I actually feel worse about have held PLTR at an average cost of $12 and sold it because of volatility than I do about selling a etf before it took off. I still own lots in OEFs and they anchor the overall portfolio. Different strokes for different folks.
Comments
I doubt that many of these ETFs, even those from respected shops (such as Harris, but see also Leuthold, First Eagle, FPA, Tweedy, GMO, a sort-of PRWCX ETF) will ever have enough volume to be serious long-term players.
Maybe someone wiser and/or more fin-savvy can explain the phenomenon to me. I like the option of being able to buy the fund directly and roll over distributions into fractional shares. My current broker not only discourages me buying low-volume ETFs, but will only purchase whole shares.
Now, by pushing a sales channel (ETFs) that by design must be sold through brokerages, they are supercharging this loss of customer contact.
(That ship sailed long ago, though see, e.g. BRUFX.)
- You probably pay more for an OEF (a negative).
- There should be less money flowing in and out over shorter periods (a positive unless you like trading).
- Your manager has some discretion when to buy and sell during times of turmoil (a positive)
- Generally, I’d expect an OEF to have a more stable investor base (a positive).
- You’re probably less likely to get jerked around by emotions in an OEF - though it depends on its focus.
Not sure why firms are moving aggressively to etfs. I’d think it’s better for their bottom lines. Or, perhaps a way to attract more AUM in the race for assets? If held outside a tax deferred account they appear to have some tax benefits. The change doesn’t particularly sit well with myself and some older investors … It will be interesting to watch this development when the next 2000 “Tech Wreck” or 2008 “Financial Crisis” comes along. Possibly the rush for the exits and ease of so doing may exacerbate whatever crisis exists.
Did the SEC crackdown on frequent trading in the years following the Tech Wreck of 2000 contribute to the rise / popularity of etfs? Older ones here will recall that trading in OEFs had become excessive - often by organized participants in high quantity. The SEC determined this “skimming” of excess return by such parties by well timed frequent trading was harming smaller more stolid investors who hung on for the longer term. Ironically, one fund firm CEO (Richard Strong) became the center of attention, found to be gaming his own funds - though not the sole perpetrator. Strong was banned for life from the business. Afterward, fund management became much stricter in passing new regulations to prevent frequent trading, enforcing existing rules and blocking trades. Did this all serve to propel etfs to popularity which, of course, can be traded at any time?
A second contributing factor may have been the fhe slow and steady decline of the front-end load structure associated with many OEFs. In the early 70s that load was still very common across the OEF universe, adding to a firm’s bottom line. But investors wised up. With loss of this OEF profit motive, possibly the etf structure became easier or cheaper to operate.
https://www.icifactbook.org/pdf/2024-factbook-ch3.pdf
Index fund (Bogle’s Folly?) usage has increased significantly over the past couple decades.
Many investors have also shown a distinct preference for ETFs versus OEFs as Yogi's post illustrates.
As a result, multiple companies now offer actively managed ETFs.
Other companies are exploring this option in an attempt to gain additional AUM.
I believe there will be an investment firm "shake-out" in the coming years.
Firms like Fidelity, T. Rowe Price, Vanguard¹, and Dodge & Cox will do ok.
As will some specialized boutiques which offer differentiated investment products.
Conversely, many companies with active funds that have above average expenses
and middling performance will just disappear.
I say bring it on!
¹ manages more than $1.8 trillion in active assets as of August 31, 2024.