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Matt HouganPresident Analytics & PublicationsETF.comLeveling the
Playing FieldDave NadigChief Investment OfficerETF.com
The ETF Revolution Is Just Getting Started
1
Bad Things Are Happening
2
Level The Playing Field
3
1
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Bill
ion
s
ETP Asset Growth
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Bill
ion
s
ETP Asset Growth
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Bill
ion
s
ETP Asset Growth
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Bill
ion
s
ETP Asset Growth
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1993 2003 2013 2023
Bill
ion
s
ETP Asset Growth
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
1993 2003 2013 2023
Bill
ion
s
ETP Asset Growth
$-
$5
$10
$15
$20
12/31/2010 1/24/2014
WisdomTree (WETF) Stock Price
$1.7 trillion
Built on a narrow base
Institutional Advisory Retail
Total Cost
Taxes
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
Large Cap Equity Mutual Funds: 1.37% Average
Large Cap Equity ETFs: 0.44% Average
ETFs cost fund companies less than mutual funds.So ETFs cost investors less.
Total Cost
Annual Fees As ETFs: $7.2 billion
Annual Fees As Funds: $21.9 billion
AUM ($, mm) Average ETF ERAverage Mutual Fund
ER
U.S. Equity 931,688 0.44% 1.37%
International Equity 406,477 0.56% 1.57%
Fixed Income 249,840 0.30% 1.06%
How Much Are ETF Investors Saving?
Source: Morningstar, ETF.com
$14,761,886,000Per Year
(That’s $40.4 million per day)
Who’s Got The Yachts Now?
Source: ETF.com as of 12/31/2013
But What About For Institutions?
Institutional Holding Periods
Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q2 2013.
0%
10%
20%
30%
40%
<1 month 1-6 months 7-12 months 1-2 years >2 years
2011 2012 2013
New Uses At The Core
Although ETFs first entered institutional portfolios mainly as tactical tools … many institutions indicate they are beginning to regularly use ETFs for many additional purposes, including gaining long-term exposures and implementing investment strategies.
- Greenwich Associates
Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q2 2013.
Dave Underwood, CIO, Arizona State Retirement System, in an interview with the Journal of Indexes
“We had not used ETFs in any meaningful fashion previously …
Very much to their credit, iShares … priced these ETFs at 15 basis points.”
Institutional Advisory Retail
Total Cost
Taxes
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
Taxes
Source: Morningstar
Active MFPassive
MFETF
Large Cap Blend 1.92% 0.16% 0.00%
Large Cap Value 2.01% 0.08% 0.00%
Large Cap Growth 1.65% 0.04% 0.00%
Mid Cap Blend 4.26% 1.25% 0.00%
Small Cap Blend 3.54% 1.31% 0.00%
Foreign Large Blend 2.50% 0.32% 0.00%
Emerging Market 6.46% 0.02% 0.01%
Source: Morningstar, 2001-2011
ETF Tax Scandal: I Sell, You Pay!
Avg. Mutual Fund Flows By Month2007-2012
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
Bill
ion
s
Source: Investment Company Institute
Institutional Advisory Retail
Total Cost
Taxes N/A
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
0%
10%
20%
30%
40%
10/1/2012 9/30/2013
% o
f To
tal M
arke
t (i
ncl
. OTC
/BB
)ETF Trading Activity
% of Shares Traded % of Value Traded
NYSE Most Actives (Friday)
TickerVolume
(millions)
SPY 183
EEM 117
BAC 111
GE 95
XKF 66
F 64
VXX 61
AA 59
C 55
IWM 52
Ticker Average Spread
IWM (Russel 2000) 0.01%
EEM (Emerging Markets) 0.02%
JNK (Junk Bonds) 0.02%
GLD (Gold) 0.01%
Institutional Advisory Retail
Total Cost
Taxes ?
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
Diversity
Pure Beta
Nerdy Quant Stuff
Pure Active
People who dig ETFs?$1.7 Trillion
People who dig:
Bill Gross?
$2 Trillion
Institutional Advisory Retail
Total Cost
Taxes ?
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
55% of ETF Assets18% of Institutions
Institutions
26,300 Advisors$920 Billion In Assets
Advisors
Retail
Asset Class Weight Fund Ticker ER
U.S. Equity 40% Schwab U.S. Broad Equity SCHB 0.04%
Developed Equity
30% Schwab International Equity SCHF 0.09%
Emerging Markets Equity
5% Schwab Emerging Markets Equity SCHE 0.15%
Fixed Income 15% Schwab U.S. Aggregate Bond SCHZ 0.05%
REITs 5% Schwab U.S. REIT SCHH 0.07%
Commodities 5% U.S. Commodity Index Fund USCI 1.03%
All-In Costs 0.10%
The 10 BPS ETF Portfolio
Asset Class Weight Fund Ticker ER
U.S. Equity 40% iShares Core S&P Total U.S. Stock ITOT 0.07%
Developed Equity
30% iShares Core MSCI EAFE IEFA 0.14%
Emerging Markets Equity
5% iShares Core Emerging Markets IEMG 0.18%
Fixed Income 20% iShares Core Total U.S. Bond AGG 0.08%
REITs 5% iShares Cohen & Steers REIT ICF 0.35%
All-In Costs 0.11%
The 11 BPS ETF Portfolio
Asset Class Weight Fund Ticker ER
U.S. Equity 35% iShares MSCI USA Quality Factor QUAL 0.15%
Developed Equity 20%db X-trackers MSCI EAFE Hedged
Equity DBEF 0.35%
EM Equity 10%WisdomTree Emerging Market Equity
Income DEM 0.63%
EM Equity 5%db X-Trackers Harvest CSI China A-
Shares ASHR 0.82%
Fixed Income 10% PIMCO Total Return Bond BOND 0.55%
Fixed Income 5% PowerShares Senior Loan Portfolio BKLN 0.65%
Fixed Income 5% SPDRs Barclays Short-Term High Yield SJNK 0.40%
Fixed Income 5% Vanguard Total International Bond BNDX 0.20%
Commodities 5% PowerShares DB Commodity DBC 0.93%
All-In Costs 0.39%
The 39 BPS ETF Portfolio
Price: Zero to 0.25%
Institutional Advisory Retail
Total Cost
Taxes ?
Trading
Diversity
Distribution
ETF Hockey Stick Checklist
2
The Gold Rush Problem
4 Worries
Toxic Products½ of
“Smart Beta” is Junk
Pay-to-PlayETF LipstickActive Pigs
Toxic Products
-100%
-80%
-60%
-40%
-20%
0%
20%
1/29/2009 1/17/2014
Tota
l Ret
urn
VXX Since Inception
½ of “Smart Beta”
is Junk
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
5/4/2011 5/4/2012 5/4/2013
SPLV
SPY
Crowding
½ of “Smart Beta”
is Junk
-0.40%
-0.35%
-0.30%
-0.25%
-0.20%
-0.15%
-0.10%
-0.05%
0.00%USMV 1-Year Tracking Difference
Tracking
½ of “Smart Beta”
is Junk
020406080100120140160180
-1.00%-0.50%0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%
Flo
ws
($, M
illio
ns)
Pre
miu
m/D
isco
un
t
VIDI Fund Flows(Millions)
VIDI Premium
Trading
Pay-to-Play
Zero Commission≠
Zero Cost
ETF LipstickActive Pigs
WisdomTree Middle East Dividend (GULF)
Schwab Emerging Markets Equity (SCHE)
iShares Core MSCI Emerging Markets (IEMG)
3
Demo Time!
2,0001,9001,8001,7001,600
$
ETF.com Analytics
1,000900800700600
$
ETF.com Analytics
3002001000.00
$
ETF.com Analytics
0.002001000.00
$
ETF.com Analytics
ETF.com/finder
ETF.com/finder
ETF.com/finder
ETF.com/finder
ETF.com/(ticker)
ETF.com/finder
ETF.com/segments
Morning Call
Instant ETF Check:
One More Thing
AlphaThink
Tank
AlphaThinkTank
Nouriel Roubini, Roubini Global Economics
Don Luskin, TrendMacrolytics
George Friedman, Stratfor
Ed Yardeni, Yardeni Economics
Tom Dorsey, Dorsey Wright Associates
Peter Schiff, Euro-Pacific Capital
Brendan Fitzsimmons, Medley Global Advisors
Rob Arnott, Research Affiliates
“What is the one area of the market you find most attractive right now?”
Asks:
“Peripheral Europe.
If you wanted to build a new auto factory somewhere in the world, you would either put it in Tennessee or in Spain. And that’s great.”
Don Luskin:
“Luskin’s call on Spain may raise a few eyebrows, but there is a solid ETF to play a resurgent Spanish economy: iShares MSCI Spain Capped ETF.
While not exactly cheap, the fund provides broad exposure and trades reasonably well. Be conscious of a heavy weighting in Financials, however.
Don’s other ideas …”
50 issues per year
$299