"ETFs are one of the few innovations of investing ... and there are few."
This came from Jack Brennan, chairman emeritus at the Vanguard Group, who spoke earlier this month in New York City at the Big Picture Conference, hosted by investment advisors and financial bloggers Barry Ritholtz and Josh Brown.
"They're easy to implement, tax efficient-they're tremendous vehicles-and it's amazing their popularity didn't happen earlier," he said, referencing the roughly $1.5 trillion ETF market in the U.S. The competition will be fiercer than ever, a positive for the industry, according to Brennan, as competition will improve the product and lower costs.
As the market continues to expand and take shape, let's continue with the "bigger picture" theme. Amid a burgeoning and increasingly competitive market, here's what we perceive as the top trends within the mutual fund/ETF universe-crowdsourced from Money Management Executive's editors and network of sources - which we will continue to dig into in future issues.
1. Alternatives: It's a shiny, relatively new toy for the mutual fund/ETF world, once used almost exclusively by institutions. Retail investors benefit from institutional strategies at retail prices, and traditional fund companies may need to acquire these assets to grow. Manager skill is of utmost importance here. "There are only a few great portfolio managers, and there are even fewer great alternative portfolio managers," says Matthew Griffin, financial consultant with Family Trust Investment Services.
2. Active ETFs vs. Mutual Funds: Active ETFs have emerged as potential competitors to active mutual funds. That said, this trend is slow because there haven't been many big names coming into the active ETF space.
3. Questions Over Smart Beta Existence: Many ETF companies are eager to introduce portfolios that mimic actively managed strategies. Popular smart-beta funds include Guggenheim S&P 500 Equal Weight (RSP), PowerShares FTSE RAFI US 1000 (PRF) and WisdomTree Emerging Markets SmallCap Dividend (DGS). Skeptics question the existence of smart beta and whether the strategy is simply a marketing gimmick or a lasting investment approach.
4. Passive vs. Active Debate: "My own answer is a very simple one: active management is not dead by any means. But high-cost active management is never going to win," Vanguard's Brennan said at the conference I attended last week. "Active will never die," he concluded. As long as there are a few active managers that can provide value, investors will be willing to try and find them.
5. Retirement Conundrum: What is really needed to gain inclusion into defined contribution plan lineups? Mutual fund managers own the retirement space. The biggest issue with getting ETFs into retirement plans is dealing with fractional shares. The technology behind 401(k) plans have been set up to handle fractional shares that trade at the end of the day.
6. Bonds No Longer Safe? Investors have become accustomed to bond mutual funds generating positive returns, but as rates moved higher this year, the average fund is down. What risks lurk behind the chase for yield?
7. Asset Allocation: U.S. equity mutual funds have seen heavy inflows in 2013 and the market is up through September. Are managers staying fully invested or keeping some cash on sidelines to use as markets become more volatile?
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