Vanguard’s McNabb Says Data Doesn’t Support ETF Bubble Fears

Although the shift to ETFs over the past ten years has been dramatic—since the start of 2008, the industry has attracted nearly $2.8 trillion in investment dollars (according to the Investment Company Institute)—Vanguard chief executive Bill McNabb told The Financial Times that he doesn’t see this as a “systemic” trajectory indicative of a market bubble. In the interview, McNabb argues that index tracking funds represent less than 15 percent of the equity market capitalization around the world, and less that 5 percent of daily trading volumes in global financial markets. [Vanguard, the article says, has “set industry records for new […]

BlackRock’s Ang on Factor Investing

Andrew Ang, who runs factor investing at BlackRock, argues that factor investing remains “the language of investment excellence” despite naysaying by the likes of Vanguard’s Jack Bogle and smart-beta pioneer Rob Arnott of Research Affiliates. This according to a recent article in Forbes. Black Rock, the article reports, has been “firing human stock pickers and betting that factor investing is the future of the struggling active-investment-management business.” It adds that Ang expects smart-beta ETFs to reach $1 trillion by 2020, and has focused his firm’s offerings on six factors; small-size, value dividend yield, momentum and quality (for return enhancement), and […]

Zweig: Cheaper Share Prices Can Be an Illusion

When ETF shares appear to be trading at a discount to the index of stocks they hold, according to a recent article in The Wall Street Journal by columnist Jason Zweig, “the apparent bargain is an illusion.” “Stock indexes, and by extension the funds that are based on them, are averages,” writes Zweig, adding, “Investment regulators say that fund companies are free to calculate and report an average valuation any way they wish, so long as it doesn’t mislead or deceive investors. So you should pay attention to how these funds report valuations.” Zweig cites examples of firms and the […]

Active Management Versus Passive Investing: How to Choose

Active management fees, coupled with periods of underperformance, have made low-cost index investing attractive for investors, writes Validea CEO John Reese in a recent article for The Globe and Mail. Indexing, Reese explains, was developed as a way for investors to track the market’s return while maintaining diversity and avoiding the time and risk associated with finding the right active manager. The article cites Morningstar data showing that, last year, the flow of funds into passive strategies totaled $505 billion, while $340 billion was withdrawn from active management. The trend, writes Reese, ‘is upending the asset-management industry.” He notes, however, […]

ETFs Make Markets Less Efficient Writes Klarman

While exchange-traded-funds have claimed a growing share of investor funds, critics say these funds are “potentially dangerous and untested through a crisis,” says a Bloomberg article from last week. In a recent letter to investors, Baupost Group founder Seth Klarman explains that the dominance of ETFs is making markets less efficient: “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.” Most ETFs, the article notes, endeavor to track weighted indexes which are “dominated by the biggest companies with the […]

Momentum Investing is Back, At Least for Now

The strategy of buying whatever sector has had the greatest price or earnings gains in the past twelve months seems to have come back in fashion, according to a recent article in Investment News. The article cites a recent white paper by AQR that addressed momentum investment results and reported that “trend-following has delivered strong positive returns and realized a low correlation to traditional assets classes for more than a century.” At the Morningstar ETF conference early in September, AQR principal Ronen Israel said that academic studies assume over-inflated trading costs associated with momentum investing (typically considered a disadvantage) and, […]

Passive Investors Should Avoid these Three Mistakes

While data supports the widespread belief that passive (or index) and ETF investing offer consistently competitive returns, a recent article in Money magazine advises investors to avoid three common mistakes when choosing this route: Assuming all index funds are cheap: Index funds are generally able to charge lower fees since they simply buy the stocks or bonds that make up their benchmark indices (instead of spending money on manpower and research). But the article argues that not all of these funds are “bargains,” and fees can range from as little as 0.10% annually to more than 10 times that amount. It’s […]

The Passive Investing Tsunami in ETFs Continues

Investments have been shifting from actively managed funds to passively managed exchange-traded funds (ETFs) for a while now, but the Brexit vote and impending U.S. presidential election have fueled the migration even more. According to a recent CNBC article, the month of May saw an $18.7 billion exodus from actively managed U.S. equity funds and an $8.1 billion inflow to passively managed, index-tracking funds, primarily ETFs (data from Morningstar). Ben Johnson, global director of EFT Research at Morningstar, believes “it’s not a question of whether the trend continues but at what pace.” The CNBC article describes the shift as occurring […]