Nate & Conor recap last week’s Inside ETFs conference, offering key takeaways and insights. We also talk Dow 20k and spotlight the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NUAG).
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The following was authored by Hollie Fagan, Head of BlackRock’s Registered Investment Advisor business.
Exchange traded funds (ETFs) have joined mutual funds and individual stocks as mainstream investment tools, and their popularity is only growing. The past year saw record flows into stock and bond ETFs. Today, one in four U.S. investors owns ETFs, according to BlackRock’s ETF Pulse survey; half of all investors plan to purchase them in the next 12 months.
Whether you’re already an ETF investor or have just been hearing about them, you may be curious to know more or understand them better. This is a great conversation to have with your financial advisor.
Here are five questions (and brief answers) to help you get started.
1. What’s the difference between an ETF and a mutual fund?
ETFs and mutual funds have a lot in common: They’re both diversified, managed bundles of securities that are divided into shares, and bought and sold by investors. ETFs are traded on an exchange just like a stock and usually track an index; however, they’re also structured somewhat differently. These features mean they’re typically cheaper to own than mutual funds, through lower annual management fees and potential tax efficiency. For more information on the differences between ETFs and mutual funds, click here.
2. How do I use ETFs?
A key feature of ETFs is their versatility. Our Pulse survey found that the top ways investors use them are to increase diversification (53%), and gain exposures to broad market indexes (43%) and specific sectors (36%). What’s more, because there’s an ETF for almost any market sliver you can think of, many investors also look to ETFs as replacements for individual stocks (42%) and mutual funds (44%).
3. How might ETFs fit into an overall portfolio?
Think of ETFs as yet another powerful investment tool at your disposal, alongside mutual funds and other vehicles. As just one example, ETFs could be a cost effective way to build a diversified core portfolio, combined with actively managed mutual funds that target specific outcomes or manager skills. It’s ultimately about what you hope to achieve as an investor and getting the best value for your money.
4. Aren’t these risky?
Investors often use ETFs to mitigate risks in their portfolios through diversification. However, like mutual funds, they carry similar market risks to their underlying securities so they’ll be subject to forces such as interest rate changes, geopolitics and industry trends. So when you’re thinking about risk, it’s important not to shoot the messenger. It’s also important to know that ETFs aren’t exotic instruments: They operate within a well-functioning, well-tested infrastructure with a lot of oversight.
5. Are ETFs trading vehicles or buy-and-hold investments?
The answer is yes. You can easily trade them in your brokerage account (and they’re sometimes available commission-free) just as you would a stock, making it easy to express a short-term market conviction. However, there might be an even stronger case for ETFs long term, namely in the cost savings, which can really compound over time. Investor behavior bears that out. According to our survey, the average holding period for ETFs is about five years; and more than a third of ETF owners have held their investments for six years or longer.
Of course, the “right” way to build a portfolio depends on your particular goals. As more and more people turn to ETFs for a variety of uses, the best way to find out how they could work for you is to ask.
Hollie Fagan is the Head of BlackRock’s Registered Investment Advisor business and a regular contributor to The Blog.
About the survey
The BlackRock 2016 U.S. ETF Pulse survey was conducted from September 12–26, 2016, by TNS, an independent research company. The survey interviewed over 1,000 individual investors and 400 financial advisors, from nationally representative online samples of household financial savings/investment decision makers age 21–75, with $100K+ in investable assets and aware of ETFs; and financial advisors age 21–75 with $25MM+ in assets under management.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses. When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification and asset allocation may not protect against market risk or loss of principal. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). ©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. iS-20060
Steven Schoenfeld spotlights the BlueStar Israel Technology ETF (ITEQ), Dave Mazza explains the SPDR FactSet Innovative Technology ETF (XITK), Andrew Chanin highlights the PureFunds Video Game Tech ETF (GAMR) & the PureFunds Drone Economy Strategy ETF (IFLY), and Christian Magoon discusses the Amplify Online Retail ETF (IBUY).
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With nearly 2,000 ETFs to choose from, finding the right ETFs for your investment portfolio has become increasingly difficult – particularly if you wish to own smaller, satellite holdings. Nate & Conor offer some tips on how to sort through the vast array of options and steer clear of ETF “landmines”. Also, Andrew Chanin, CEO of PureFunds, spotlights the PureFunds Solactive FinTech ETF (FINQ) and the PureFunds ETFx HealthTech ETF (IMED).
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Nathan Geraci is President of The ETF Store, Inc. and host of the weekly radio show “The ETF Store Show“.
“I try not to get involved in the business of prediction. It’s a quick way to look like an idiot.” – Award-winning author Warren Ellis
There is a natural human desire to know what the future holds. If we could peer around the corner and see what lies ahead, we might be able to protect ourselves or perhaps capitalize on an opportunity. The desire to predict the future is something innate and deeply rooted in all of us. This is why predictions, and especially predictions from people appearing to know more than we do (so-called “experts”), can be so enticing. However, if there is a single lesson learned from 2016, it is that you should not count on experts to get anything right. Ditto for the wisdom of crowds.
From predictions of China’s economic demise to the Brexit (UK voting to leave the European Union) to the US presidential election, experts (and just about anyone else offering a prediction) had a rough year. According to The Economist, on the day of the Brexit vote, UK betting markets “priced about an 85% likelihood that Britain would remain in the EU”. On the day prior to the US election, Hillary Clinton winning the White House was nearly a foregone conclusion according to the polls.
From an investment standpoint, even if you had a fully-functioning crystal ball and correctly predicted the outcomes of these major events, there existed a high likelihood you still would have failed to capitalize in the financial markets. Recall that widespread expectations were that stocks would crater in the unlikely scenario of the UK voting to leave the EU. While stocks did briefly dip following the UK’s decision to leave, they were nearly back to even just a few trading days later and 3% higher a month later. A similar scenario unfolded with the US presidential election, where most experts predicted sharp stock declines if Donald Trump proved victorious. Once again, while stock futures did plummet on election night as the unexpected results of the election became clear, stocks actually closed in positive territory the day after. As a matter of fact, from the day following the election through the end of the year, the S&P 500 returned nearly 3.5% – now referred to as the “Trump bump”.
In the end, you might think of market predictions the same way you think about predictions for your favorite sports teams: they can be fun, entertaining, and even informative at times – but they are usually worthless. For our Kansas City-based clients, the warm glow from the Royals’ 2015 World Series title likely still exists. At the beginning of that season, ESPN polled eighty-eight of their baseball “experts” and guess how many picked the Royals to win the AL Central? Three. Three out of eighty-eight analysts. That was just to win their division, let alone the world championship. Whether sports, politics, or financial markets, the bottom line is nobody has a crystal ball. As economist Edgar R. Fiedler once said, “He who lives by the crystal ball soon learns to eat ground glass”.To recap: Most experts incorrectly predicted the outcomes of major events in 2016. Making matters worse, even if the outcomes of these events had been correctly predicted, financial markets reacted in a matter that went against expert consensus. As it relates to the US presidential election, in last quarter’s commentary, we said “attempting to handicap the market reaction to either outcome is a fool’s errand”. Taking action in your investment portfolio in 2016 based on expert predictions or the wisdom of crowds would likely have resulted in foregone returns, or even worse, booking losses at the most inopportune times.
Just because 2016 was a tough year for soothsayers, we are not expecting the prediction business to die anytime soon. From rising interest rates to anticipated economic growth from Trump’s fiscal stimulus to the always present “higher market volatility” prediction, market and economic prognostications are already coming fast and furious. Instead of relying on predictions, we subscribe to the time-tested investment philosophies of longer-term thinking, maintaining discipline, diversification, asset allocation, and minimizing investment costs. No crystal ball is needed to provide us with a high level of confidence these will lead to investment success.
One last unrelated note: A record $287 billion flowed into US-listed ETFs in 2016, while a record $359 billion dollars came out of actively managed mutual funds. A massive sea change is occurring whereby investors are shunning expensive, chronically underperforming mutual funds and gravitating towards lower cost ETFs. Matt Hougan, CEO at Inside ETFs, recently commented in the Financial Times:
“There is a manifest destiny for ETFs. They are the structure that people will use to get exposure to securities in the future, and mutual funds will be banished to the dustbin, like typewriters have been replaced by computers. It’s just a better technology and so it will come to replace funds over the next 20 years”.
For clients both new and old, we would like to take this opportunity to simply thank you for your trust and belief in our investment process. Our firm was founded nearly nine years ago on the idea that there was a better way to invest. It is highly rewarding to watch the landscape shift significantly towards our core investing values. You are at the center of everything we do and we hope you will take some satisfaction in both the growth of ETFs and the growth of The ETF Store. We wish you a happy, healthy, and prosperous New Year and, as always, please do not hesitate to contact your advisor with questions regarding your investment strategy or the markets.
