The Inside ETFs Conference, one of the largest gatherings of investment advisers in the world, begins Monday.
Nearly 2,500 participants are expected in Hollywood, Florida, for four days to debate the future of investing in general and dissect the enormous momentum behind exchange-traded funds.
Last year was the biggest year ever for ETFs — with the biggest inflows ever (nearly $480 billion) and record assets under management ($3.2 trillion). More importantly, ETFs have stopped being an exclusively retail phenomenon. Pension funds, sovereign wealth funds, insurance companies are not just investing but in some cases founding their own ETF firms. Even insurance firms like Prudential and Hartford now have ETF firms.
Most participants believe the main underlying trends will continue in 2018: Money will continue to flow 1) out of mutual funds, into ETFs, 2) out of active management, into index funds and 3) out of higher-cost funds — both mutual funds and ETFs — and into lower-cost funds, but particularly ETFs.
Here’s a rundown of the hot trends everyone is talking about:
- What will happen to bitcoin ETFs? The SEC seems to have slammed the door on approving future ETFs with a sharp letter, saying bitcoin ETFs had serious problems involving valuations, liquidity and custody. But momentum behind blockchain is so strong that investors are already looking for ways around the SEC’s objections. Could a fund be designed that would address the SEC’s concerns? If not, is there a way around those objections? Would an exchange-traded note (ETN) — a debt security issued by an underwriting bank that would track the return of bitcoin without physical ownership, but would be backed by the bank’s assets — be achievable in the U.S.? There are already bitcoin ETNs in Europe.
- Socially responsible ETFs: Is this finally the year? BlackRock CEO Larry Fink got a lot of attention last week with a letter to corporate America, telling them they needed to get more socially responsible. Environmental, Social, Governance ETFs have been around for years — but so far have attracted only modest assets. The largest ESG ETF, the iShares MSCI 400 Social (DSI) only has $1 billion in assets under management. Deborah Fuhr, managing director at ETF Global Insights, believes ESG funds will finally be getting more attention: “Millennials have more interest in this than younger people did five to 10 years ago, and I think older people are also starting to become more aware. We are at the inflection point where people are really talking about ESG and I think more money will be put to work.”
- Regulation: Can ETFs withstand a downturn? Though ETFs have weathered several downturns, there are still concerns about liquidity — particularly around more esoteric products. Should those involved as market makers and those who have the right to create and redeem ETFs meet higher standards than there currently are?
- Fee wars: Where will it end? Fees keep dropping: The average ETF can be bought for roughly 30 basis points ($3 per 10,000); you can buy an S&P 500 fund like the iShares Core S&P 500 ETF (IVV) for a mere 4 basis points and the fees keep dropping. Investors care — the vast majority of flows (more than 80 percent) have been into the lowest-cost funds, which are for the most part indexed to the S&P 500, the Russell 2000 and the Nasdaq 100.
- Active management: Is this finally the year? Active managers have been losing money to indexers for years. A variant of active management, smart beta — which uses rules to track alternative metrics, such as momentum, quality or volatility — have been actively marketed but have failed to attract major investments beyond a couple of bond funds. This time around, many are insisting that the inevitable downturn in the market will finally come in 2018, and that active managers who can move far quicker than indexers will finally be vindicated.
Maybe, but it’s a very tough sell, as Fuhr points out, “Most active management have not proved they can deliver alpha. Many are moving away from active management and instead using asset allocation with index-based ETFs.”
Look for interviews with Vanguard CEO Tim Buckley, NYSE President Tom Farley, VanEck CEO Jan van Eck (who recently withdrew his bitcoin ETF filing) and even music legend Quincy Jones here on CNBC.