Navigating the growing ETF landscape
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Brand music plays.
Onscreen text: Navigating the growing ETF landscape, Charles Schwab Investment Management
D.J., in a suit and tie, stands in a lobby with a Morningstar banner behind him.
Onscreen text: D.J. Tierney, Managing Director, Client Portfolio Strategist
D.J. Tierney: What I like to point out to advisors is looking at the ETF market can be pretty intimidating. There's over two thousand different funds to choose from. The comparison I like to make is you wouldn't want to go to the grocery store to do your weekly shopping while you're hungry without a shopping list. So, likewise, when you start to look at the ETF market, start with your investor. What are their objectives? What does their existing portfolio look like? Starting there with the investor's objectives in mind, that'll lead you to the asset class and maybe the investment style that's most appropriate for them.
Once you've gotten to an asset class, then you can focus on how to evaluate them. What's the cost, what's the liquidity, and what's the actual underlying exposures of the index? If you start there, you can use the market and all its choices to your benefits. In equity, U.S. equity market-cap products now, you can actually buy ETFs with expense ratios as low as three basis points. So, look for low cost, look for liquidity of the fund, and then ask yourself does the underlying index complement the investor's existing portfolio? If they have a bunch of active advisor funds in there, then low-cost market cap could be the perfect complement. If they already have low-cost market cap, perhaps it's time to consider strategic beta. So, again, if you start with the investor's objectives in mind, use the multitude of choices in the market to service your clients, you'll have a good outcome.
Onscreen text: Evaluating strategic beta ETFs
D.J.: According to Morningstar, there's over 650 strategic beta ETFs now on the market. Over 220 multifactor ETFs, so product proliferation is big. There's a lot coming on. So, what we would advise advisors for their investor's behalf is to look to funds with an established market record, you cannot back test the data, but actual time in the market. And then ask the question "How does this product fit my client's existing portfolio?"
At Schwab we think a differentiated strategic beta can be a complement to index market cap, can be a complement to active, and serve a real purpose for offsetting returns which, again, can reduce risk and enhance returns over the long term. So, key is, with strategic beta, is liquidity. Is the fund big enough and stable enough that it's going to make it in the long term? Again, cost. A lot of these new products are coming online with big OER expenses, so look for relatively low cost. Big expenses can be a big hurdle for the strategy to overcome with performance over the long haul. So, to tie it up: look for low cost, look for real time in the market, and a committed provider that's going to be with you for the long haul.
Onscreen text: Trends in ETF flows
D.J.: ETFs as an investment vehicle are doing quite well. 2016 was a record inflow year. 2017, we've already surpassed it in inflows, so two noteworthy points about inflows that I would make: one, a majority of the flows into ETFs are not going into U.S. equities; the second point is low cost is winning. So, to talk about that, 2017, again record inflows. The story is the biggest asset class to gather assets in ETFs this year are international equities. It's often under-reported, but over 38% of inflows this year have gone outside the U.S. equities.
Secondly, fixed income is really growing in ETF as well. Year-to-date, 30% of the flows have gone into fixed income. You also have commodity ETFs, so what's left after that is going into domestic equities, but it turns out that it's less than a third of inflows 2017 are going into US equities.
The next point, low cost is winning. So, of the 2,050-some-odd ETFs out there, only 120 have operating expense ratios of 10 basis points or less, so that's around 6% of the ETFs. Those ETFs have 40% of the assets in the industry and year to date they've captured 50% of the inflows. So, low cost is winning. Cost matters to investors. At Charles Schwab, we're one of the scale-sized players that is committed to using our scale and expertise to remain committed to low-cost investing and low cost ETFs.
Onscreen text: Disclosures. Past performance does not guarantee future results. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
The opinions expressed are not intended to serve as investment advice, a recommendation, offer, or solicitation to buy or sell any securities, or recommendation regarding specific investment or trading strategies. Information and data provided have been obtained from sources deemed reliable, but are not guaranteed. Charles Schwab Investment Management makes no representation about the accuracy of the information contained herein, or its appropriateness for any given situation. Charles Schwab Investment Management, Inc. (“CSIM”), the investment advisor for Schwab’s proprietary funds, and Charles Schwab & Co., Inc. (“Schwab”), the distributor for Schwab Funds, are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.
Some of the statements in this video may be forward looking and contain certain risks and uncertainties.
The views expressed are those of D.J. Tierney and are subject to change without notice based on economic, market, geopolitical, and other conditions.
Please note that this content was created as of September 2017 and reflects the speakers’ views as of that date. It will be kept solely for historical purposes, and the speakers’ opinions may change.
©2017 Charles Schwab Investment Management, Inc. All rights reserved. (1017-7NWH)
D.J. Tierney, Managing Director, Client Portfolio Strategist, discusses trends in the ETF market, how to navigate the growing ETF landscape, and provides three key factors for evaluating strategic beta ETFs.