The concept of “fake news” is certainly not foreign to most ETF investors. The ETF industry has experienced exponential growth
over the past two decades, and with that
progression also comes an influx of self-styled experts. A Twitter handle, blog,
website or even a guest appearance on
a television show can now provide platforms for such individuals to present
their commentary as facts when they
realistically are not.
Despite misinformation becoming
more prevalent among new media, legitimate ETF experts who have bought,
built and sold ETFs still exist and should
be relied upon for accurate analysis, even
if a little extra work may be required to
locate and properly vet them. Separating
fact from fiction, the following statements revisit five inaccurate characteristics commonly applied to ETFs.
ETFs are low-cost. On the contrary,
ETFs are investment vehicles that can
carry low, high or even performance-based fees. Conceptually, it’s like assuming a hedge fund or a private fund
structure is designed for high fees, when
in fact low fees can exist among such
funds. The ETF structure, however, can
help mitigate costs as previously discussed in this column.
Low trading volume means no
liquidity. While this holds true for stocks
because their new shares cannot be created or redeemed by a market maker,
all investment company ETFs are structured to be open-ended, as an unlimited number of shares can be created or
redeemed on a daily basis. As long as the
underlying securities in an ETF remain
liquid, ETF shares can be purchased or
sold at a price very close to NAV, and
occasionally even better than NAV.
Remember to use limit orders and
to obtain help with trade execution; an
advisor can always call the capital markets desk at an ETF sponsor or an ETF
liquidity provider, too. In fact, unlike
stocks, liquidity gets better with bigger-sized ETF trades.
A transparent ETF can’t deliver
alpha. A number of strategic (or “smart
beta”) ETF providers are “out-indexing”
their traditional index counterparts.
Discretionary active management also
exists among both bond and equity ETF
strategies, with many outperforming
their index benchmarks.
If large mutual fund managers indicate that they cannot be transparent
with actively managed ETFs, remember that transparency remains a likely
component in their separately managed
accounts, typically to some of the largest
institutional investors. All the while, no
industry research has ever surfaced that
validates alpha would disappear in a
ETFs cause flash crashes. Algorithmic
trading can move at exponential speeds,
and a few ETFs have overtaken the largest
individual securities in terms of trading
volume. However, at $2 trillion in total net
assets, ETFs remain the tail on the dog.
ETFs represent a speck in a universe
of trading intertwined among futures,
bonds, closed-end funds, hedge funds
and that other investment vehicle with
$17 trillion in assets — mutual funds.
Sometimes exchanges and market making can break, and if ETFs did not exist,
they would still break from time to time.
Mutual funds will be gone in 10
years. As an ETF sponsor, I can get
behind this notion! Kidding aside, mutual funds will not be gone in 10 years.
While mutual funds can possess a few
advantages over ETFs, their overall market share will inevitably become smaller,
but it won’t vanish into the sunset either.
While fake news has evolved into the
term du jour, no industry stands immune
from misinformation, whether inadvertent or intentional. In today’s new media
world where so many people have access
to an electronic megaphone, separating
truth from fiction can present a challenge. Even within the ETF space, identify experts that you trust, ask questions
and make sure to continue to educate
yourself to provide the best opportunity
for a successful investment experience
for both you and your clients.
Noah Hamman is CEO of AdvisorShares.
By Noah Hamman
Watch Out for Fake News
To get beyond the chatter, it’s good to revisit a few myths about ETFs