Investors are abandoning traditional, actively managed mutual funds in favor of “passive” index funds, particularly exchanged traded funds, or ETFs. Wall Street has taken note and is offering a wide variety of ETFs to attract investment money. How do you tell the difference between a good ETF and a bad one? When is it better to invest in an ETF? When is a traditional mutual fund the wiser choice? ETF experts Matt Hougan, CEO of ETF.com, a leading ETF research firm and Matthew Peron, head of Global Equity at giant wealth management firm, Northern Trust provide the answers you need to make the best investment decisions on this tenth season premiere.
WEALTHTRACK Episode #1201; Originally Broadcast on June 26, 2015
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- Head of Global Equity,
- Northern Trust
It’s hard to believe this is the tenth anniversary year of WEALTHTRACK on Public Television! Our goal then and now is to help our viewers build long-term financial security, through disciplined, diversified investing, with advice from some of the top professionals in the business.
Over these ten years, we’ve tracked some of the major trends in investing. This week, we are discussing what could be described as a global explosion. Money is pouring into passive index funds, especially Exchange Traded Funds, or ETFs.
Global assets in ETFs just broke through the $3 trillion mark. There are now nearly six thousand ETFs and Exchange Traded Products to choose from. They are listed on 62 exchanges in 51 countries, although more than two thirds are in the U.S.
Unlike index-based mutual funds, (started in 1974 by Jack Bogle at Vanguard), ETFs (created in 1993 by State Street with its S&P 500 SPDR ETF) can be bought and sold like ordinary shares on a stock exchange. The ability to trade them is considered to be a big plus by many and a negative by critics, including Bogle, who believes it can lead to market timing and frequent trading.
However, similar to older index mutual funds, ETFs are low-cost. That has become a huge draw for investors. According to a recent report by Morningstar analyst, Michael Rawson, 95% of flows into funds of all types over the last ten years have gone into funds in the lowest cost quintile. The biggest winners by far have been passive funds, especially ETFs.
Passive funds now account for 31% of total fund assets covered by Morningstar, up from 14% a decade ago. ETFs are gaining market share fast. They now account for 14% of mutual fund assets up from only 4% ten years ago.
The largest ETF and the most heavily traded security on any stock exchange is State Street’s pioneering SPDR 500. However the variety of ETFs offered is multiplying rapidly. They come in all shapes and sizes. They are based on broad market indices as well as tiny niches. For instance, one of the most popular slices recently has been baskets of Japanese and European export companies hedged against the yen and the euro.
ETFs are available in stocks, bonds and commodities with different flavors being created every day. That means it is becoming more of a “buyer beware” product.
How can you tell the difference between a good ETF and a bad one? When should you use them, when not? Those are some of the questions we will pose to this week’s guests.
Matt Hougan is the CEO of ETF.com, a leading authority on Exchange-Traded Funds. Prior to becoming CEO he was President of North America for the firm where he oversaw its core online and print media properties, ETF.com and ETF report. Houghan writes for The Wall Street Journal, has been a 3 time member of Barron’s ETF Roundtable and is an ETF columnist for the Journal of Financial Planning.
Matthew Peron is Senior Vice President and Managing Director of Global Equity at Northern Trust, a leading investment management firm with nearly a trillion dollars in assets under management. Among his responsibilities is overseeing what the firm calls its Engineered Equity strategy, which it describes as a middle way between active and passive management. Northern Trust was one of the early users of index mutual funds and ETFs. 80% of its global equity assets, nearly $400 billion worth, are in indexed strategies.
If you miss the show on air this week, you can always watch it on our website. We also have an EXTRA interview with both Matthew Peron and Matt Hougan available exclusively online. As always, we welcome your feedback on Facebook and Twitter.
Have a great weekend and make the week ahead a profitable and productive one.
KNOW WHAT’S IN AN ETF BEFORE YOU BUY IT
- You can’t judge a book by its cover
- ETFs are transparent
- You can see what’s in them
- Do they represent what you want?
- Morningstar and ETF.com analyze and rank ETFs
No Bookshelf titles this week.
PERON: AGE APPROPRIATE
- For a younger investor: a value-oriented stock strategy = More volatile, but provides excess return over long-term
- For an older investor: a low volatility strategy = Less opportunity for risk and loss of capital
HOUGAN: LOWEST COSTS
A low-cost ETF portfolio
- Exposure to thousands of stocks & bonds in different countries
- Low expenses make a big difference over time
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Matt Hougan, CEO of ETF.com didn’t start on investing’s passive side. He tells us what drew him in. And Matthew Peron, Managing Director of Global Equity at Northern Trust explains why an engineering degree helps him oversee the firm’s Engineered Equity strategy, which he describes as a middle way between active and passive management.