Inside ETFs is the leading conference on Exchange Traded Funds (ETFs), and this year it was held from February 10th – 13th in Florida. The ETF product continues to be one of the fastest growing investment vehicles globally, with adoption from both retail and institutional users. Below we provide a summary of the key issues discussed at the Inside ETFs conference.
1. US regulatory proposal
In 2018 the US SEC proposed a rule that would simplify the approval of new ETFs. The rule is open for comments for industry participants and the public, and the SEC is reviewing the comments received. At the conference, it was emphasized that this new approval simplification rule, if it comes into effect, would apply only to traditional 1940 Investment Act funds, and not to Exchange Traded Notes (ETNs) or Leveraged & Inverse products. The SEC rule also emphasizes continued transparency from fund providers, such as the publishing of daily ETF holdings and additional information on bid-ask spreads.
2. Economic outlook for 2019
Greg Davis, the Chief Investment Officer of Vanguard forecast 2% real GDP growth for the US in 2019, with a 30-40% chance of a recession in 2020. He also forecast that US inflation would remain moderate in 2019 at 1.5-2% and that the US Federal Reserve would raise rates around June 2019. Davis also forecast that US equity returns would be ~5% in 2019 with bond returns being 3%. Separate comments from Robert Shiller, the Nobel prize winning economist from Yale seemed broadly in line with this economic outlook. He emphasized that this has been the longest economic expansion since the NBER started collecting data in the 1850s. Given that and the 10-year bull market in stocks, by definition, the expansion and bull market could not go on forever and could end relatively soon.
3. ESG and Factor Investing
The interest in factor and thematic smart beta ETFs continued to be high this year, with ESG ETFs (environmental, social and governance) getting a lot of attention this year. Analyzing historical ETF holdings to identify style and thematic drift can be an important element in examining these ETFs. Paul Tudor Jones, the hedge fund investor and founder of JUST Capital, highlighted that investing in ESG themes sourced from polling the pubic can simultaneously generate alpha and also force companies to become socially responsible.
He provided an overview of a new ETF (JUST) that was launched in 2018 that selects 500 stocks from the Russell 1000 Index that rank high on 'just business behavior and practices', such as fair worker pay, customer privacy protection and community engagement.
Larry Swedroe, the Director of research at Buckingham Wealth emphasized that truly diversified portfolios should be diversified across systematic risk factors that go beyond a traditional 60/40 equity and bond mix.
4. Overall ETF industry outlook
The consensus at the conference seemed to be that the global ETF industry would continue to grow rapidly from about $5T currently to between $20-25T by the year 2025. ETFs have had 60 consecutive months (5 years) of positive net flows, and have already surpassed hedge fund assets.