An inflated market?
In another panel at the Canada Cup, a number of product manufacturers walked through their offerings. Barclays Capital now offers exchange-traded notes, which are not stocks but promissory notes—like an index-linked GIC. Claymore Investments has a variety of ETFs that are not market-weighted, but rely on fundamental weighting. BlackRock, which manages iShares, is the market leader in market-cap weighted ETFs. And BMO has recently entered the ETF space in Canada with some equal-weight ETFs. Then there are active ETFs offered by Horizons AlphaPro, and inverse and leveraged ETFs provided by Horizons BetaPro.
There’s been a proliferation of product, and Claymore president Som Seif expects a culling, if only because companies can’t afford to support a product that isn’t profitable.
“There has to be a consumer need,” adds Oliver McMahon, BlackRock Canada’s head of product. “You have to be solving a problem.” He expects yield to be the major influence in forthcoming ETFs.
Still, as product proliferates, Rebetez asks, “what risks are you really taking when you invest internationally? Are you taking company risk where your correlation might be so high with the domestic market that you’re not really diversified, or are you taking currency risk and is that really the asset class that you are after?” When these risks are considered, he adds, the debate has gone beyond simply passive versus active investing.
Indeed, former hedge fund manager Richard Kang, now chief investment officer at Emerging Global Advisors, argues that ETFs are “moving to something we might call beta-tilting or beta-timing.” In itself, however, that is active management. “With certain markets, you can select where you want to be active and passive.”
Still, the rise of ‘beta-tilting” worries advisors like Ferri. “Advisors want to get paid and if they want to get paid they have to do something.” Once, active management was something that was outsourced to fund managers. Now, he says, “The asset allocation and the active management has come from the outside into the inside,” adding that “advisors are going from alphas-seeking funds to beta-seeking funds under tactical asset allocation.” A buy, hold and rebalance approach, he suggests, doesn’t pay as much.
In defense of beta-seeking ETFs, Kang argues that “indexing was, at one point, a benchmarking business” for buy and hold passive investors. He questions whether, in the absence of bull market, the investing world has moved beyond buy and hold. That said, he suggests “the whole point of the ETF is that they’re a Swiss Army knife.”
Taking up the Swiss Army knife analogy, Blitzer says that investors need to take a number of steps before using an ETF. Investors first have to define the level of risk they want to assume, and then define the universe of options. Whatever it is, “once I define the universe, that universe defines beta for me,” Blitzer says.
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