I just got back from one of the larger and better ETF conferences "Inside ETFs," sponsored by the IndexUniverse. Clearly being in sunny Florida for a couple of days, getting away from the snow in New York has its attractions. Just seeing bright sun and breathing fresh ocean air does lift one's spirits and clears one's mind. But let's not forget the conference itself.
There were over a thousand participants and I met quite a few people, Individual Investors, Registered Investment Advisors, Family Offices, Wealth Managers and Service Providers. This is a good spot to learn from the experts, as well as to hear the latest news and gossip. I can describe my experience in four distinct thematic categories: The New, The Old, The Unspoken and The Speculation.
The new part is that trading ETFs and knowledge how to execute trade well is actually more important than before. Historically most RIAs and Wealth Managers have been using mutual funds in building client portfolios. They are comfortable with mutual funds and typically can discern the good ones from the bad ones. Trading has never been a concern. You do your analysis, you pick a set of mutual funds that fit your client's criteria and you simply put on the trade with Fidelity, TD Ameritrade, Vanguard, Schwab, or wherever you custody your accounts. The trade is done at the close, you don't know the price, but you know the trade will take place and you are done for the day. Not so with the ETFs.
Clearly the benefits of ETFs over mutual funds are louder and more pronounced than ever before and many investors are only happy to take advantage of the lower management costs, liquidity, transparency and tax efficiencies of the ETFs. But trading is becoming important. Most of us when they see an order form, we input at the ticker, quantity and for the type of order we simply choose the simplest Market Order. We don't look at the bid ask spread, we don't pay too much attention to volume we typically don't have Level II quotes. What this actually means is that we can get burned and our order might potentially be executed at the worst possible price.
I learned several trading suggestions that I believe are important. First of all, unless you are trading SPDR Dow Jones Industrial Average (NYSEARCA:DIA) or PowerShares QQQ Trust, Series 1 (NASDAQ:QQQ) or Sector SPDRs or similar high volume, highly liquid ETFs, you never, ever want to do a Market Order. The suggestion is to always do a Limit Order with the Limit Price be somewhere around several cents below or above the Ask Price. If you do so you will able to execute most of your trades within the price that you are comfortable with. The second thing is that you never want to place an order right when the market opens or right before market closes. These can be highly volatile times, not representative of the ETFs true value and these trading times are better reserved for trades, not investors. The third point on trading is that if you actually do look at the daily volumes, relative to average daily volumes, these might not truly represent the liquidity of your ETF. If you have an opportunity to speak with the broker directly, but execute on the platform to lower your costs, you should always speak with the broker first, before the trade, to get the an understanding of most recent trading history during the times you want to place the trade for your particular ETF.
This old theme comes through a perpetually asked question, will the Actively Managed ETFs take off, and if yes, then when. As quick reminder, the actively managed ETFs actually have portfolio managers behind the strategy and they don't typically follow an index, like S&P 500 or the like. This portfolio manager is actually a live human being who is responsible for the strategy and who is doing the research and analysis, as opposed to a computer calculating weighting decisions. I frankly had enough, of people asking me this question because we are well beyond that. The investors piled more money in ETFs than mutual funds last year, so that already should answer the question. Granted these inflows were mostly into index ETFs, but this surge is making investors seek the same benefits from ETFs in the actively managed strategies in the ETF wrapper. Bottom line is that the investors I spoke with, have tasted the flavor and they are fully aware of the benefits of ETFs vs. mutual funds, they are now actively and aggressively seeking to replace mutual funds with ETFs.
The unspoken theme is similar to the old them above, but more generic. Will the ETFs overtake mutual funds. Again, it is not if, but when. I am not saying that the mutual funds will go away anytime soon, but the volume of ETFs, both passive and active is growing at a tremendous pace, while the volume of mutual funds is not. It not just supply vs. demand issue, where as I mentioned above, investors are asking and demanding for alternatives investment vehicles to replace the mutual funds. The supply part of this is very active as well. There are almost a dozen mutual fund and investment firms filing for exemptive relief, i.e. the ability do to active portfolio management in an ETF and bring more ETFs out to the market.
Pimco's Total Return ETF is scheduled to launch in just over a month. The big question is, what kind of impact this ETF will be on the market and why is Pimco doing this. At the conference, it seems that everyone had an opinion on both of these. Clearly this being an ETF conference, everyone expects this to be a watershed event for the ETF industry. The thought is that by launching this ETF, the funds will start piling in into this product and the rest of ETFs will experience a tail wind from such a big splash. other ETFs as well. I would generally agree with this, but I would want to see the performance of this product relative to its mutual fund older brother. The ETF by default would have to be different and have different holdings than the mutual fund because there will be no derivatives of any kind. So although undoubtedly Bill Gross can and will generate market demand, I hope the performance will not deteriorate due to such a large one time asset inflow.
I highly recommend going to quality conferences like these. I learned a great deal and I met some very interesting people, who are innovative and ahead of the curve. The conversations are easy, people are relaxed being away from their desks and there is a lot of talent on the ground.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.