Trading Has Taken Over the World

By Jim Wiandt

Is active trading the real story behind the ETF boom?

Matt Hougan goes through Murray Coleman's numbers about ETFs and talks about them like they are a boom in index investing (by which I mean not just use of indexed products, but also belief in the index philosophy, which means low-cost, buy-and-hold, asset-allocation-focused investing). ETFs amounting to 30-40% of equity trading doesn't sound very passive to me. Astonishing, yes. Passive, no.

By the way, OUTSTANDING NSX data feeding, Murray. I've been a big fan of Mike Traynor from his Vanguard and then Susquehanna days. Nice work, whoever is putting that together w/ Mike.

In a year of unprecedented volatility (and that is no overstatement), ETFs have begun to take over the investing world. Again, my question to Matt is, how much of that impressive flow has come from buy-and-holders, and how much of it has come from traders?

I guess the real question is, "Does it matter?"

Generally, my feeling is "No." As an ETF investor, I am benefiting from all of the (I would say insane) rapid-fire activity of all of those ETF traders. The funds are larger and have more scale because of the flow of their assets, and they're more tax efficient and tight to market, because of the sheer volume of their trading (and the accompanying creation and redemption activity).

So mainly I feel like ETFs have ingeniously harnessed the drive toward greed for me, and have given me institutional scale and pricing, with better tax efficiency (and as Jack Bogle would say) "tradable in real time all day!"

But enough already about tilting this story toward "ETFs are all about the sensible, long-term-focused, asset allocation investor." Matt is wrong to imply that. Bigger drivers of business (recently anyway) have been the hedge fund traders and the want-to-be active managers bent on timing the market.

I've spent some time the past few weeks preparing to moderate the opening panel of the 2009 Inside ETFs conference, which kicks off in Boca Raton, Fla., on Sunday. The panel should be a great one, with Don Phillips from Morningstar, ETF convert and CIO of Vanguard Gus Sauter as well as Northern Trust's Steven Schoenfeld. In our preliminary discussions, Philips has been arguing strongly that the bleed of mutual funds has not been into ETFs (as again, Matt implies); it has been toward "safe" assets. ETFs' boom in the last year HAS been about trading, not Joe investor's move to ETFs, but he equates this to the Internet bust in the fund business, and I disagree with that. The fact of the matter is that the marketing from the big ETF players IS on responsible, smart asset-allocation investing.

And if you think the ETF business is going to blow up, you're kidding yourself. It IS the wave of the future, but that is the case not because of the Bogleites, it's really the unholy teaming up of the Bogleites with the fast money gold diggers.

Comments

[George Simone:]

So the question for an ETF investor {?} is to buy-and-hold or to trade. The answer is both. In all markets - but especially in the volatile ETF game - the two main muggars are "support" and "trend-momentum" and they determine if certain sector ETFs ought to be traded or held.
Roughly speaking, for the industrial and financial sectors ETFs, during the period from March to October /07 support and momentum were bullish and these ETFs traded as such. From October /07 to around May /08 support and momentum turned mostly flat, with the result that industrial and financial ETFs were either sold or held.
All of this changed drastically in May of /08 when support and momentum turned decisively bearish, and the rest is history. But since the December /08 low, support and trend-momentum have turned totally flat, and are now neither bullish not bearish. It means that both - Bulls and Bears - are sitting on the fence and in no mood to jump off on either side. This is why the market is moving mostly sideways, within a relatively narrow trading range where ETFs are mostly in a holding pattern, which could also be construed as a part of an basing process. If this is so, then Small Caps, Mid Caps and Financials are best positioned to be market leaders on the next leg up.

Jan 12 07:07 AM