More on ETFs and the Trading Landscape

By Jim Wiandt

There's no end in sight for ETF volumes. Capitalism is alive and well. So are bad trading ideas.

It is obviously no exaggeration to say that ETFs have completely altered the way the people look at the stock market.  And for those of you who have been around ETFs for 10 years, making that sort of assertion would have elicited either a chuckle or an "E T What?" ten years ago.

And I think Matt Hougan really hit the nail on the head, by saying that ETFs are all about trading.  We focus on the long-term buy and hold side.  But that is not where the bulk of those hundreds of millions of traded shares daily are going.  As I've noted before, ETFs are actually being used (in tremendous volume) by some of the very largest players - including the very largest hedge funds - out there.  And that is another assertion that would have been scoffed at not long ago.

So we look at all of this, and we wonder what to think.  The fact that ETFs are all about trading and have their prices analyzed minute by minute certainly lends some credence to John Bogle's assertions that ETFs "now you can buy the S&P 500 in real time all day long" have made investors more likely to trade and to speculate - particularly as they've gotten more finely sliced.

But honestly, I think the core index investing asset allocators out there are safe and mostly disciplined, and that the rest have always been prone to buy high, sell low and generally behave irrationally and speculatively...driven alternately by greed and fear. They're now just doing it in a different way - using ETFs!

And if you don't believe it and think that ETFs are all about old school indexing, you must be living a very, very sheltered life.  Google "ETF" and then start reading through some articles, and tell me what percentage of them are speculative.  I'd say about 90%.  And a lot of this is driven by do-it-yourself active managers making market timing calls - and getting just as hammered as they did at all the wrong times around the tech boom, the nifty fifty, whatever latest insanity has been going on.

But the gist of it for US (the indexer tribe) is that all of this tremendous activity is making our market exposure cheaper, more tax efficient, and tighter to the market than ever.  All those nuts are working for US.  So it's hard for me to find really anything to complain about with all of that trading activity.

And welcome to the Index Universe team, Eric Rosenbaum. I love your story on ETFs exceeding 30% of total equity trading volume. You took something we'd been talking about and put hard numbers on it.  I love that.  And you've also brought in two of my long-time favorite people into your article without even a mention from me. Mike Traynor (formerly Vanguard then Susquehanna) is a longtime friend and has always had great data around ETFs. I'm delighted he's moved to the upstart NSX. And Gary Gastineau, is of course, Gary Gastineau... always with an opinion framed in a way that elicits either laughter or growling.

And I'm also delighted that all the fears around market concentration with exchanges appears to have been completely, almost farcically unfounded.  You've got these new guys (BATS at the front of the line, taking tremendous trading volume - like 20%! of ETF trading volume).  It firmly restores my faith in capitalism - again.  The fact of the matter is that there will continue to be a relentless chipping away at trading anytime there's an inefficiency or it can be done better, faster, cheaper, tighter.  So I'm just delighted at the continued scrapping there.  It's good for us all, it's good for markets.

On Gary Gastineau's last quote about the ETN market seeming dead because of credit concerns. You'd better believe that the credit concerns (and maybe to a degree before that the uncertainty on tax issues) slowed things up a bit.  But I can feel it in the air (enter the drum sequence from that  Genesis song) that there will very soon be a lot of new ETN activity, so brace up.

Finally to wrap up a blog I've had fun with today (thanks Eric!), I'd like to mention one more dumb trading idea. You can basically say anything on a blog (as you'll know if you've read Matt Hougan over the years).  You can find two completely opposite opinions right now on about any trading topic, expressed with equal passion.

Here's a favorite I came across today.  This guy says the easiest short play in the world is the Massive Opportunity to Short the Dollar. If there's one thing I've learned in my own years of market mishaps, it's that there's nothing more difficult or brutal than trying to find a bottom...to catch the proverbial falling knife.

And that is what shorting the dollar is.  I mean look at the history of currency rates...it's one of wide, multi-year swings. And if you're willing to put any stock in the fundamentals in the currency arena, I've got a bridge in London I want to sell you.  Anything goes with currency, but momentum and long-term directional swings rule the day. Or maybe they don't. Who knows?  Betting on currency is tough enough.  If you're on the wrong side (and my money says the dollar sees par with the euro before the euro sees $1.50 again), just empty your wallet into the toilet... and flush.

Comments

[Prudent Man...:]

ETF's, though good trading vehicles, are an investment analysts' headache. One or two companies, because of the open-end, flexible nature of etfs, can affect the price of other stocks in the security.

Although I have made some money in ETFs, as an analyst I detest them. But, I didn't last fifty years in this business without being adaptable.

2008 Sep 11 11:06 AM