By Christian Magoon
CEO and Founder, Magoon Capital
Since it is Thanksgiving week I thought I would cover a few reasons why I am thankful for ETFs. As an investor I have benefited from this nearly 20 year old investment product and have a passion to see others discover the efficiency, transparency and flexibility that most ETFs offer. While ETFs have come a long way since their inception, many investors still haven't been exposed to ETFs. Given that, here are several reasons I'm tipping my hat to ETFs this Thanksgiving.
I am thankful that the vast majority of ETFs are transparent with their holdings on a daily basis. Being able to make precise investment decisions requires timely information and ETFs are essentially the only packaged product to provide that. Knowing what the ETF holds at all times allows investors to make more informed asset allocations and then monitor that the ETFs stay true to their mandate. Transparency also allows investors to quickly assess the impact of market moving events to their portfolio. ETF investors can access their daily exposure to market segments like sectors or industries and drill down to the level of individual securities. This visibility is akin to the detail available from a high definition television when compared to black and white television. The extra level of detail and information simply makes the experience better.
I am also thankful for the investment selection ETFs offer to investors. A variety of ETFs - especially in the commodity space - offer direct access to asset classes and strategies that were cumbersome and often very costly for an investor to access. Of course physical gold ETFs standout in my mind here. It is estimated that an investor in gold coins may pay somewhere between a 5 - 8% markup over the institutional price of gold when purchasing the coins. Physical gold ETFs, whose shares are backed by gold bars stored in vaults, offer investors the ability to access gold returns between a .25% - .40% markup over the price of gold. That's exponentially better economics for the investor interested in exposure to physical gold prices.
As a former ETF Sponsor and now a consultant to ETF Sponsors, one may think that I would not like competition. Instead the opposite is true, I love it! As the competition in the ETF space has grown so has the innovation level in products and structure. Competition has led to breakthroughs in structure - the physical gold ETF is a great example - access, and costs. Sponsors both old and new are constantly pushing the ETF industry forward in ways that other industries like the mutual fund industry can't keep up with. In just the last 18 months ETF competition has produced developments like commission free ETF trading, a slew of actively managed ETFs, lower price points for ETFs in major market segments, the healthy closing of products investors weren't interested in, better ETF education efforts and a massive lineup of new companies seeking to deliver their asset management expertise through ETFs. The level of competition is intense, but so are the benefits for the investor. Lower expense ratios, new asset management strategies and free trading are just some of the tangible benefits to be thankful for.
While I'm clearly a fan of ETFs and I'm thankful for them as an investor, I realize ETFs aren't perfect. For investors to continue to experience the benefits of ETFs, the industry must redouble its efforts on ETF education and rationalization of product offerings. ETF education must become more uniform to truly reach as many investors as possible. In addition the education must include related qualification measures for investors who want to invest in more sophisticated ETF offerings.
Finally, ETF Sponsors both old and new need to spend more time in their product development process. Only the best ideas with immutable value propositions should make it to market. In addition Sponsors must go beyond simply developing a product and pushing it out of the nest. Education, marketing and distribution strategy for each product should be carefully developed and executed, in order to maximize each ETF's ability to earn its way into investors' portfolios.
Now I realize this Thanksgiving we have much more to be thankful for than ETFs! So in that spirit, I wish readers a Thanksgiving full of enjoyment with family, friends and the freedom our democracy offers. All the best to you this holiday.