“Retail investors have won the battle of fees. Brokerage accounts are free. Trading commissions are history. Anyone can own the entire stock market through a single exchange-traded fund for basically nothing. It’s a huge win for investors and terrible for the investment industry.”
I copied this paragraph from…I do not know where. Sometimes I save stuff that I think could be useful for future posts but then I forget to save links 🙁
Anyway, this was just to say that investing is solved, I am gonna close this blog because it is not necessary anymore. Or not?
Well, the investment industry is not going to give up so easily. Especially when plenty of “investors” are not satisfied by just owning the market. Some investors start this journey with the best of intentions: why should they buy unprofitable companies at absurd multiples? Enter the Value factor.
But then…why only the value factor? There are plenty of factors out there. Passive is not that great, innit? But wait a second, what is passive anyway? Owning garbage stocks? Owning bonds at negative rates? What about gold, is it passive or not owning gold? And how much?
Investors are lost again.
And that’s the opening the financial industry needs to get back into the game. If nothing is passive then everything is active, so you should not be ashamed of buying a product that __________ [fill as you prefer]:
- satisfy your appetite to gamble
- fit a particular narrative you like
- provide additional income
- make you feel safer
Active ETFs
It is particularly hard for me to tackle this topic because you only have to peek at my Model Portfolio: what are all those ETFs if not active? They are active AND leveraged! How would I (I!!!!) dare to tell you that active ETFs are garbage?
The key point (for me!!) is that I buy and combine strategies that are backed by research, data and facts. Obviously that research might be wrong for whatever reason, or I might be dead by the time I am proven right. Will value ever overperform again? Was the past the anomaly? I do not think we will ever have a definitive answer.
But if I have to “sin”, aka deviate from whatever definition you hold of passive, I prefer to do it this way than…buying the QQQ. Why should a bunch of companies that decided to list on a particular exchange outperform in the future? You tell me.
You might not agree with ‘my’ research but at least I have that. What I am going to present to you is, at the very best, research that explains why it should NOT work. There are two main themes around active ETFs that are emerging, one in the Anglo-Saxon side of the financial world and one in the Old Continent.
Here is the main reason for the misalignment:
“For decades, UK financial advisers were paid commissions by fund management companies to put their clients in actively managed funds, even though the vast majority underperformed low-cost index trackers. Only a small proportion of advisers recommended index funds. Then, in 2013, the FCA banned commissions, and over the last decade, 92% of new money invested has gone into index funds.”
source: Robin Powell on Twitter
Europoors
In continental Europe, financial “advisors” are still paid kickbacks for the products they sell. While regulators sleep on this (when not actively going after actors that want to raise awareness), investors are slowly waking up and smelling the shit. So the financial industry is starting to prepare a Plan B, intending to at least protect some of the fat margins they are currently getting out of their clients.
Eurizon Capital, the asset management arm of the biggest Italian bank, is launching an active ETF targeted at…UK investors. Makes sense: you do not want to cannibalise your milking-cow base (Italy) but set up the platform is case you will need it in the future.
In the meantime, the private bank arm of the same Italian bank launched its own ETFs. This time the alleged focus is on ESG criteria but it smells like “Plan B” again. The AUM of each fund is currently at 50m, just enough to cover fixed costs (wonder why? ;)); by owing the advisory channel, they can decide how much money to shift there and offer an alternative to those clients that are threatening to leave if they cannot access cheaper products. ESG is an (ever)green excuse to charge higher than normal fees anyway.
Other asset managers like Robeco, who do not have a final-client relationship, are following the same steps. I guess hoping that their brand would generate some direct demand from retail but mainly because advisors are having a harder time selling what is becoming a tainted product in mutual funds. ETFs mean goodbye to entry fees but they can still retrocede part of their management fee to advisors. Again, better to have the ETF platform ready for when the (eventual?) storm lands.
The US
Here the strategy everyone is employing is a clever one: throw spaghetti on the wall and see what sticks. For real.
On Twitter, I follow this guy who posts only about new ETF launches. He has been busier than deranged trying to kill Trump these days. I’ll show you some examples:
Covered call ETFs
Goldman Sachs – Buffered ETFs
Active ETFs
Active again
A shop launched a “Nasdaq without the top 30 companies” ETF and, at the same time, “Only the Nasdaq top 30 companies” ETF. If this is not throwing spaghetti on the wall…
These guys of STF management went to Animal Spirit to talk about 2 ETFs: a market-timing one and one following the same strategy but with a covered call on top (I guess, after the first 10 minutes of nonsense I started to focus on my running pace and kept them as a background noise). Because there are investors with different preferences out there, ahahahahah sure, take some pasta!!
The upside of all these tossing is obvious: if you have an ETF that outperforms the benchmark for 3 years for whatever reasons, you can live and eat out of its legacy for a loooong time. Look at ARK, it is a risk worth taking. You do not need to have an ex-ante investment thesis anymore, you can build one ex-post and promote your acumen to the masses. Who’s paying attention anyway?
Active ETFs are great in advisors’ Model Portfolios. Yes…ok…stop laughing. I get a ton of shit for my model portfolio because no one understands it, that’s the truth. But if I included one of those income ETFs, an AI thematic fund or some other bs that lights up the right client’s heart, my coaching page would explode. And that’s what advisors around the world do: an 80% “passive” portfolio plus some active shite that makes the client happy and them smart-looking. Win-Win.
Those active funds are more volatile than broad, diversified solutions (or worse, because those income ETFs remove the positive side of volatility). The impact on risk-adjusted returns is similar to paying 1% or more in fees yearly. The difference between fees and risk is that the former is a single, easy-to-understand number that funds are required to disclose to investors, whereas the latter is a more subtle cost that many investors can’t fully decipher.
What I am reading now:
Follow me on Twitter @nprotasoni
4 Comments
Edoardo · October 23, 2024 at 9:31 pm
Financial industry is trying to move investors from “stock pickers” to “etf pickers” because everybody wants to feel special. And you, Nicola, are not different with your weird portfolio ;-).
TheItalianLeatherSofa · October 24, 2024 at 6:47 am
with the small difference that I do not get paid for it 😉
Edoardo · October 27, 2024 at 12:52 pm
I mean… you are not different from everybody who wants to feel special with a portfolio that allegedly should deliver superior performance.
TheItalianLeatherSofa · October 27, 2024 at 8:24 pm
I am happy that some ETF providers bring (not at all new) strategies to the market so I can follow them with 1 click. They get the fee, I get the (proven by research) risk-adjusted returns. Maybe the research would prove wrong but there’s nothing special about it. At the end of the day, it is simply betas A+B+C in a more efficient manner.