MASTERCLASS: Liability Driven Investing - October 2019
October 7, 2019
Remy Blaire: Welcome to Asset TV. ETFs provide investors with many advantages, diversification, lower fees and tax efficiency are just a few of the benefits of investing in a basket of assets. I'm Remy Blaire and joining us today, Rene Casis, ETF Portfolio Manager at American Century Investments, Ed Kershner, Chief Portfolio Strategist at Columbia Threadneedle Investments, Matt Collins, Vice President, Exchange Traded Funds at PGIM Investments, and Greg Collett, Director of Investment Products at World Gold Council.
Remy Blaire: This is Asset TV's ETF Masterclass. Gentlemen, thank you so much for joining me for the ETF Masterclass. Now, this year marks the 10-year anniversary of the bull market and we're seeing plenty of wealth being generated so I want to start out by talking about the factors that are driving demand into the ETF space. Starting out with you, first and foremost, what does the current interest rate environment mean for investors seeking income?
Ed Kershner: I think we're in a new rate environment. I got a simple question for you guys, what year did you start in the business?
Matt Collins: 2006.
Greg Collett: '97.
Rene Casis: '97.
Remy Blaire: I started in the business in 2003.
Ed Kershner: None of you ever saw any trace to anything that go down. Think about that. From 1981 to 2017, rates went down. What will happen to bond price when rates go down? Prices go up. Rate of return from something on a 10-year bond over 37 years is eight and a half percent a year roughly. Thirteen years of double digit returns and four years of a 20%.
Ed Kershner: You only have five years of negative returns. I joke with my [PM 00:01:49] colleagues that you got to try to lose money in the bond market so it's a new rate regime. I'm not saying they're going up again but you're not going to get equity like returns, 80 and a half percent from bonds. There's going to be more to making money in the bond market obviously with interest rates to duration.
Ed Kershner: We're going to have to look at spreads. We're going to have to look at FX. We're going to have to look at factors beyond this simple just go along boss because rates are going down.
Remy Blaire: Well, you made a very important statement as well as asking the rest of the panelist when they got into the business because we are definitely in a deferred rate environment. Rene, I do want to move on to you. Can you explain to me how important it is to consider the details of portfolio construction in ETF strategy for the end-investor?
Rene Casis: Absolutely. When ETFs first came into the market, most, if not all, of the strategies were really market cap-weighted strategies. In bonds, they were mostly debt-weighted strategies and since that time, we've seen strategies evolve to sectors, countries, now looking at different factors. Looking at fundamental metrics in order to alternatively wait strategies.
Rene Casis: Though those are really great for portfolio outcomes for clients, I think what's really important is understand not only how these work in isolation but how do these products work with other products that are in the portfolio.
Remy Blaire: Since you mentioned alternative, I'll move on to Greg. Now, when it comes to gold, we've been seeing very interesting price action for that precious metal. The year 2018 saw lots of volatility for gold and in terms of this year, we're still eyeing key technical level but at least when it comes to gold, ETF, they rebounded and closer but what do you expect to see and what's driving that space right now?
Greg Collett: Yeah. Well, first, I'd say, you're actually correct. Global gold, ETF, AUM is only up marginally up about two percent in 2019. Gold ETFs really bifurcated into ones that are better for shorter term trading and ones that are better for longer term holding. The ones that are better for longer term holding, they have seen fairly strong positive inflows for some time.
Greg Collett: Hopefully, we'll talk a little bit more about those two different types of gold ETFs a little bit. With respect to the general global gold ETF flows, first of all, at the World Gold Council, we recently launched a site called Goldhub that is arguably, the world's best repository of information on all thing’s gold. If investors are trying to look into what is driving the price, what is driving the AUM growth in gold ETF, I'd encourage them to go to Goldhub.
Greg Collett: You can go to www.gold.org and that's a fantastic resource. What you'll find there to bottom line it, when we look at periods where the Fed is moving from a stance of hiking to a more neutral stance, you often find that there's a bit of a handover period where gold is not reacting immediately to that. In the intermediate term, gold has tended to do pretty well after that period has ended.
Greg Collett: That springs out of our general framework for how we look at gold. That basically, it's driven by four things. It's basically driven by economic expansion. That doesn't get a lot of airplay, but you have consumers around the world buying jewelry and gold, going into tech right there.
Greg Collett: That accounts for about 60% of the demand and so economic expansion on the world, that tends to be supportive for the gold price. Then you have opportunity cost and that's where the interest rates come in. Risk and uncertainty talk of trade wars tends to be supportive and then just momentum factors. Right now, again, to bottom line it, we think this period where the Fed is switching to a more neutral stance is going to be very supportive.
Remy Blaire: Okay. Well, I do want to move on. Matthew, now, given the current rate outlook for the US Central Bank, the Fed Reserve. Have you noticed a change in behavior from clients in just the last several months?
Matt Collins: Yeah, absolutely. I'd make a really great point. Particularly, in terms of everyone has enjoyed the market over the last 10 years and that's led to a certain sense of complacency for investors. They've been gravitating towards low cost, passive vehicles that have big AUM numbers and trade a lot of volume because in a bull market, you can just ride, ride the wave.
Matt Collins: I think what we're starting to see is investor is much more interested in active management, thematic, ETFs factor-based investing primarily because they're positioning themselves for future movement whether it's rate movement or equity volatility. We've certainly seen a change there. On the interest rate side, in the fixed income side, it's been somewhat amazing how short everyone's memory has been.
Matt Collins: Everyone is moving out of longer duration and/or high-yield the last couple months of 2018. Everyone's piling back in. Particularly in high-yield, the first part of this year so we expect that to moderate a bit. The one area that's been fairly constant of the last two years and it's continuing here today is the ultra-short space.
Matt Collins: The ultra-short space is yielding anywhere from 2.7 to three percent at a point two duration, point three. You're gaining about 50 basis points more by going to a duration of six in the Barclays AGG. That's not a trade a lot of people are looking to make quite yet. You certainly do a lot of price appreciation by extending your duration, but we continue to see people increasing their allocation to ultra-short vehicles.
Remy Blaire: I think you brought up a keyword there and that's complacency. It's easy for retail investors, advisors to get complacent in this type of current bull market. I do want to talk about adapting. We all know that if there's volatility, it's not necessarily a bad thing for both sides but when it comes to this time of year, we tend to think about taxes, and they do say with certainty, death and taxes are among the certainties in life.
Remy Blaire: Ed, moving onto both taxable as well as tax exempt, fixed income, benchmark investing, can you tell me about some of the trends you're seeing right now?
Ed Kershner: Well, let's begin with the fact that the biggest bond ETF out there is the AGG. Okay? The AGG, let's understand. The AGG is a benchmark. It is a market cap-weighted benchmark. Okay? The idea that you would invest in a market cap-weighted fixed income benchmark is close to nonsense. Think about it. You're buying the most bonds with whoever sells the most bonds, whoever's the most indebted.
Ed Kershner: I can't understand why equities use market cap. Market cap is a measure of success. In a bond market, it's a measure of who's the most indebted so it's an illogical approach to investing yet it is the biggest solution out there. You have to go beyond the benchmark. It's not diversified. It's MBS and treasuries are about 70% of the index.
Ed Kershner: They have an 84% correlation. They act the same. You're stuck with these lower terms, albeit low risk assets that are probably not meeting most investors' need. Look. The interest rate of what I'm talking about, rates going down. The analogy I give is I was on vacation with my wife and one of the things is they took us to the top of a mountain and went downhill bicycling for 25 miles.
Ed Kershner: I'm a really good downhill bicycler but we got to town, and the problem is, I said, "Let's keep going." [Maxine 00:09:34] says, "Where are we going to go?" Anywhere from here, you're not going to be a really good bicycler anymore. I think you have to go, first of all, beyond this passive benchmark index where there's … In the taxable space or if you're going to the annuity space.
Ed Kershner: If you look at the annuity benchmarks, the annuity market is a million individual bonds. Almost $4 trillion of market value, 80,000 issuers and yet the annuity benchmarks only track less than 20% of the market. They don't actually cap and they exclude a lot of opportunity that they tend to be loaded up with general obligation bonds. GOs.
Ed Kershner: Most of them, of what … Housing bonds, some of what? Hospital bonds. Revenue bonds belong in an annuity portfolio. Yes, general obligation used to be the gold standard. They were first in line. Well, what happened in Detroit? What happened in Compton? All of a sudden, you find out. You want to go beyond this core GO which dominates the benchmarks.
Ed Kershner: 65% of annuity bonds are revenue bonds and yet they're not being captured in these passive benchmark-like solutions.
Remy Blaire: That brings me to you, Rene. I know that the ETF landscape continues to evolve, and change will always occur in any type of financial instrument so can you tell me about the role that active management plays in the space?
Ed Kershner: Absolutely. I think that active management is present in all investment decisions. Even if you're using passive market cap-weighted products in your portfolio, you're making an active decision if you're going to say, overweight the United States or underweight bonds. In that alone is an active decision but then further from that, I think we've started to see move evolvement in portfolio construction techniques that go into strategies.
Ed Kershner: Particularly ones that you'll find in ETFs. As Ed mentioned, with the AGG for instance, 90% of the risk of that index comes from interest rates. As you're starting to think about how you construct a bond strategy and how it fits in the overall portfolio, you have to ask if you want to balance that risk and if you want to turn that around.
Ed Kershner: You're going to have to use more active approaches, more active strategies in order to get more credit exposure for instance. In the equity landscape, there's different ways to go active. You can go pure stock selection. You can use fundamentally based approaches or quantitative approaches or a mix of all. Then further from that is to make these strategies more adaptive to changing market conditions.
Ed Kershner: As you say, change is always going to happen so it's important to think about when you're constructing a portfolio in ETF is to how well is it going to be adaptive to changing market conditions so that investors who make an allocation to these types of strategies can remain confident in their asset allocation throughout a full economic cycle despite any of the bumps that they'll hear along the road.
Remy Blaire: Well, you highlighted a lot of interesting points when it comes to equities, ETF. Now, Greg, can you tell us a little bit more about gold-backed ETFs. I know they received a lot of attention depending on what's happening in terms of fundamentals, but can you explain the difference between the various types of gold-backed ETFs that are out there?
Greg Collett: Sure. What we're seeing is the gold ETF market has really split into some ETFs that are better for shorter term trading and some that are better for longer term holding. To some degree, you can apply this to many corners of the ETF market. You're absolutely right. There's shorter term trading gold ETFs. They are very reflective of sentiment moment to moment and the hallmarks of those and really, we manage GLD, the world's largest gold ETF.
Greg Collett: Got a very deep liquid market, has this very active options market. Those are the hallmarks, right? That's what makes them very good trading vehicles. Your trading costs are very, very low and I would encourage advisors to think about the total cost of ownership meaning what are your trading cost when you're getting in and out of an ETF.
Greg Collett: When you're thinking about that, you have to think about what yearly management should say but what are those in and out cost. That's where funds that have this deep liquidity that have this option market. They're very good for that shorter-term trade. There's a whole other class of gold ETFs out there now that their hallmark is just a low yearly management thing.
Greg Collett:If you are looking to hold gold in your portfolio, buy an ETF and you're going to hold it long term, that's definitely an option that you should be looking at and so that's something I think advisers should be aware of.
Remy Blaire: Could you go into more detail about what steps are involved when an investor decides they want to invest in a gold-backed ETF?
Greg Collett: Yeah, it's the magic of ETF so it's just like any other ETF. You can invest in these things through your securities brokerage account. They are, as a general rule, giving you cost-effective and convenient access to that basket of assets. Particularly, in the case of gold that's making it very convenient that you can get exposure to gold in your portfolio through your securities brokerage account.
Greg Collett: A share just like any other ETF is its a pro wrap-up portion of that basket of assets. It's a very convenient way to add exposure to gold. Just the economics of gold to portfolio. Those shares, those gold ETF shares, they tend to track the price of gold very well like when I pulled them up on Bloomberg. I pulled GLD up and the price of gold. The lines are virtually indistinguishable.
Remy Blaire: Well, we'll see whether or not that precious metal loses its lustrous as we head into the rest of this quarter but Matt, I do want to move on to you and talk about the high-yield space.
Matt Collins: Sure.
Remy Blaire: Now, do you think there was a place for active ETFs to fit in?
Matt Collins: Absolutely. From our perspective and I think we talked about this a little earlier. As we surveyed clients, we managed over a trillion dollars for a very wide variety of clients and asset classes. The high-yield space in ETF land is predominantly passively managed. When we talk to clients, far and away, that's the asset class where they don't want to truly just invest in passive.
Matt Collins: If you think about the very definition of the asset class, it's non-investment grade. The idea that you simply just buy every security in that market just doesn't hold water. It doesn't make sense to us. Focusing on a product solution that has fundamental credit research, a risk managed approach but also gives you the overall metrics of the benchmark, the overall risk profile of the high-yield space.
Matt Collins: That's a leap forward, we think, for investors. I think ideas like that, not just in the high-yield but certainly other asset classes, that's what's going to make active ETFs one of the world drivers of growth in the future.
Remy Blaire: Matt, this is a purely subjective question but when it comes to this type of active ETF, what due diligence do you think should happen?
Matt Collins: We keep stressing to clients to blend how you look at a mutual fund with how you look at an ETF. For clients that are studying ETFs, they're focused, laser focused on bid/ask spreads, volume, maybe premium discounts, the assets in the fund. Those are all important things but they're ignoring the most important which is the investment outcome that that product is offering.
Matt Collins: We feel like the industry is going to continue to move somewhat away from the passive products and start to explore, how does what I'm looking for achieved through the product that I'm using outside of the simple passive space. We'd like to see more of a focus on the investment manager, the risk budgeting of the product in addition to some of the other things that you traditionally look for in an ETF.
Remy Blaire: Do you think, Matt, that trading active ETFs could be an issue for some clients?
Matt Collins: The question again is why did it take so long for active ETFs to come to market? I think over the last, let's just call it 20, 25 years, education was progressing slowly over time. How do I use these things? Should I focus on certain metrics? As the education has expanded, people are now really comfortable buying ETFs even if they don't trade a ton per day.
Matt Collins: There's also just a lot of resources out there. Every wirehouse, every RA has a trade desk that they can call, and they can call the provider to get into the product at a fair price even if it doesn't trade very much in a day, so we'd really want to see the blending of due diligence in the space.
Remy Blaire: Now that we've gotten a perspective from each and every one of you, I do want to open up the entire floor so if you could tell me a little bit about what you think in terms of investors, buying into ETFs, what are you seeing in terms of the retail space as well as institutional?
Ed Kershner: I think what we're seeing is … I think there's an absolute role for active. At Columbia, we ran about $500 billion and we have 45, 50, four and five, our funds so if you want our best thinking every day, that's what our active funds are for. What we did that was, I think, different here is … I think we all agree benchmarks are not an appropriate ETF.
Ed Kershner: When you look at an ETF and we can capture much of the behavior or active measure on a rule’s basis. For example, the AGG is only about 40% of global market cap. It's not capturing the global bond market. Do you want to capture the whole global bond market? Then you got to buy whoever issues the most debt. It's barbell so you've got the US and Japan with relatively low yields.
Ed Kershner: Then you got places like Italy and Venezuela, very high yields so we can create rules to avoid problems like that. Emerging markets, well, do you want to be in emerging markets? The definition is problematic. Italy's debt-to-GDP is 130%. Ports was 120% and they're called developed economies. Chile is 25%. Korea's debt-to-GDP is 40% and they're called emerging markets.
Ed Kershner: You can set up rational rules in a rules-based or what we call strategic beta approach to investing in ETF wrapper and capture a lot of the benefits of an active measure with a total transparency that a rules-based gives you as opposed to unknown. You don't know what a portfolio manager is going to buy until they buy it. In a rules-based approach, you know exactly what you're buying, exactly what you're going to own.
Remy Blaire: Gentlemen, what are your thoughts?
Rene Casis: I think I'm seeing the same involvement that Ed is saying. We're seeing a lot of active strategies being packaged and then more rules-based systematic format and I think investors, clients certainly like the transparency that they see. I think that as we start to move forward, I think we're going to start to see more pure active approaches and strategies being present in ETF wrappers.
Rene Casis: Now, one of the things that we may potentially lose out on as … There's nothing of this type today but going forward is you might lose some of the transparency for instance. In that case, it's going to come down to the due diligence. It's going to be understanding the people who are managing the products, the philosophy that they're implementing.
Rene Casis: What risk management approaches do they have. You're going to find that as you search for good active managers, you can only find other advantages in the ETF wrapper with the lower cost, with the potential for better tact efficiency, so that's where I see the evolvement going and we're also seeing more different types of clientele diving into ETFs.
Rene Casis: You mentioned some of the retail space that's certainly been a large presence. Institutional clients are also starting to invest more heavily in ETFs. We're starting to see more insurance companies. Not only be more interested in using and implementing ETFs in their own portfolios but also becoming providers of ETFs in and of themselves.
Rene Casis: We're certainly seeing, continuing to see higher rates of adaption for ETFs. I think that active strategies are certainly playing a very pivotal role there.
Remy Blaire: Greg, what are your thoughts?
Greg Collett: Yeah, I would agree with all that. I think ETFs are a big part of the reason we're living in a golden age for investors and we're fast approaching the point where everything that you could've gotten in some other wrapper is now being put in an ETF. It's often being done in a more cost-effective way than was done, say, a generation ago.
Greg Collett: It's giving you access to asset classes that you couldn't have gotten in the past and I see no reason that that doesn't just continue to grow for the foreseeable future.
Remy Blaire: Matt, your thoughts?
Matt Collins: Yeah, for us. We're hearing a lot about packaged solutions whether it's investment portfolios or robo-advisors. On that side of it, we're seeing a lot more work on the front-end to make sure that the outcome that they're trying to achieve is mashed with the investment outcome of the product. The more work that you see on the front-end, the more the advisor can focus on the backend and client engagement and help them grow their business.
Matt Collins: I think the role of model portfolios and packaged solutions will continue to grow and push the industry forward.
Remy Blaire: Well, gentlemen, it does seem as though we've gotten your perspective as well as your thoughts on what we're seeing right now so I do want to move the discussion into the future. Rene, starting out with you, what role do you think risk management will play into product development going into the future?
Rene Casis: I think that risk management plays a very key role in, certainly, the strategies that American Century has developed. Risk management is very much at the forefront in terms of understanding not only the types of exposures we want to offer as a strategy but also thinking about the outcome and then when you're blending those two ideas, risk management is going to play a very pivotal role there.
Rene Casis: It's going to … We want to understand the types of companies that we're investing in whether it's an equity or a fixed income strategy to ensure that these are quality companies that we're investing in. Then from there, identifying the types of exposures whether it's value, whether it's growth or some blend of both. Then thinking about risk management.
Rene Casis: We also take a very quantitative approach to this and coming from an organization that has its roots and fundamental active management, it is a way for us to blend the ability to provide fundamental active management but use a quantitative approach when it comes to risk management to ensure, again, that the types of strategies that we're putting together are adaptive and ones that can maintain themselves consistently across various economic regime changes.
Remy Blaire: We all know. When we read the business headlines in the paper or we're watching business news, there's a lot of headlines that mention risk management when it comes to ETF especially as we continue on in this bull market.
Remy Blaire: Another word that we hear often, or an adjective is diversification or diversifying so how do you think a more inclusive opportunity set will enhance diversification in ETFs?
Ed Kershner: Again, the idea here is the benchmarks aren't diversified. We discussed that. The annuity benchmarks are not diversified. What you can do if you think about portfolio theory is you can buy risky assets in a portfolio that has other risky assets that don't move the same way so a correlation. The correlation of emerging market debt and developed market non-US debt is less than 50%.
Ed Kershner: Where the correlation of high-yield in US treasury is actually negative which makes sense. High-yield is like an equity surrogate so if you put some high-yield into a bond portfolio. You put a non-US sovereign developed market into a bond portfolio along with your treasuries and along with your mortgage-backed securities, you actually create a more efficient frontier.
Ed Kershner: You get higher yield but you don't capture the risk of owning a high-yield ETF or a non-US ETF. You also can screen these or filter them to capture much of the benefits of an experienced active measure. For example, if you think about the developed non-US sovereigns, Japan, Germany, Italy, et cetera. Why would you buy market cap?
Ed Kershner: You don't owe Japan. One of the things that we do, I said, "Look at all the 10 largest developed markets equally." Well, let's match New Zealand as Japan. I don't think New Zealand's a lot riskier than Japan. It might be even less risky. Another thing, and its simple rules, we're not going to own negative yields. That's a currency bet.
Ed Kershner: That is not a fixed income investment, so you take the experience of an active measure and you put in … These are obvious rules. Yeah, if you have an experience running active funds, you do it and so you can create a more diversified portfolio that captures much of the benefits and diversification. Lower risk, higher returns, the more efficient frontiers so to speak.
Greg Collett: If you want an asset that's totally uncorrelated to stocks and bonds, take a look at gold.
Remy Blaire: Well, Greg, since you just mentioned gold, I also know that there's been a lot of talk in the business news headlines as well as general news headlines about crypto and gold. First of all, what do you think of digital currencies and given that there's some products out there that could be considered as substitute for the precious metal. What do you make of that space?
Greg Collett: Maybe mid last year, this might've been a tougher question, but I think given what's happened with cryptocurrencies, just no. This is not the same thing as a gold investment. You look, the equity market took a small and brief tumble toward the end of last year. Gold did just fine. Bitcoin last year, what was it? It went from like 20,000 to 5,000 ballparks, something like that.
Greg Collett: That is not the diversifier you're looking for. I would also argue that it's going to be really hard for Bitcoin or any of these cryptocurrencies to ever play that role, right? For 5,000 some odd years, people have agreed, gold is a good store of value. Unless you get a whole big chunk of the planet to decide, yeah, we're going to ditch that concept that once, it's lasted that long.
Greg Collett: It's very set, and I'll agree, and we're going to go to this thing. Cryptocurrencies are not going to dislodge gold.
Remy Blaire: Well, thanks for your take on that space. I know there are some gold, digital backed gold ETFs that are very interesting, but we'll save that discussion for next time. Matt, since we're talking about this. Give me your take on what you think about large asset managers that are new to the ETF space and how they should approach the market.
Matt Collins: Yeah, every asset manager has taken a different approach to the market and we've seen some pretty major players join the market just in the last couple of years surprisingly. Outside of your core passive providers, PGIM's approach to the market is to fully integrate our ETF business into our legacy business. We're not starting a separate business that's trying to do its own thing.
Matt Collins: We're leveraging the same portfolio managers that are already managing, say, 70 billion in high-yields, 60 billion in ultra-short. We're leveraging the same portfolio managers that our clients already know. We're leveraging a research team, a distribution team that our clients already know. That speeds up, I think, the educational process for clients where they know.
Matt Collins: When they see your ETF, they know how to think about it. To us, that's a truly product agnostic offering where the client can simply choose, I like this PM. I wanted the mutual fund wrapper. I want it in the ETF wrapper, whatever fits their overall needs or theme of the portfolio. We're doing our best to make sure it's tight as possible on the ETF side.
Rene Casis: Yeah. What I've observed at least is that some clients think of ETF as an asset class in and of itself. In American Century, we're doing very similar things where we're leveraging the infrastructure. We're leveraging the portfolio management expertise, the investment expertise, the risk management techniques that already existed in the firm and applying that to the ETF wrapper.
Rene Casis: I think that's a huge concept, I think, for some of the investors to overcome is to understand that, again, ETFs aren't an asset class. They're a wrapper. You can find that the same philosophy, investment philosophy that exist in a firm's platform can then be placed into an ETF.
Rene Casis: It just offers clients much more flexibility. Do they want to own a mutual fund, or do they want the flexibility and trading capabilities that you can get with an ETF?
Ed Kershner: I think that should come in as a standard. We agree with both of them. The same people who design our active funds, design our rules-based funds, they're the portfolio manager of record. Actually, on our rules-based, strategic beta funds. Conceptually, I think what Columbia Threadneedle did uniquely is we've only been sort of rules-based actively even in our active funds. What does that mean?
Ed Kershner: We use something called the five P process where we look at what our active managers do. They explain their discipline but then we make sure they're following their discipline. If they underperform doing what they said they're going to do, we understand. Not for 10 years or five years but briefly. If you underperform not doing what your mandate was or your discipline was, then that's a conversation we have to have.
Ed Kershner: I think this integration of the active measure into the process of designing the solution and actually helping speak about the solution, is I think is the initiatives among any of the substantial participants in the investment business today. Columbia Threadneedle or these other organizations.
Remy Blaire: Rene, I want to ask you before we move on to the next section. Since you mentioned exposure as well as outcome, how can investors achieve combining both their desire for exposure and also getting a favorable outcome?
Rene Casis: Great. Yes, I think this is and I think this is a huge advantage of where ETFs are today. I think in some ways, it can be daunting that there's over 3,000 ETFs that are out in the market today but it can also be looked at as an opportunity because once you identify the outcome that you're seeking to achieve, then you can find or attempt to find the combination of ETFs that will best fit and align with the desired outcome.
Rene Casis: I don't think that the two conversations are both certainly will have to happen in tandem. I think that it's important to think beyond the labels, beyond the niche or hot topic type of exposures that tend to be out there. It's glamour ETFs because we're getting a lot of attention in the financial noose. To really just think about, how does the ETF actually fit in the portfolio?
Rene Casis: From there, you can find the best set of ETFs that can fit the outcome that you're looking to achieve.
Remy Blaire: I do want to move on to education so when it comes to education of advisors, what do you think should be happening right now? What do you think is missing? Starting with you, Ed.
Ed Kershner: I think there's a bit of a fear of ETF. I think someone mentioned, "Gee, this ETF doesn't trade a lot. It's not liquid." Well, I think we all know the underlying liquidity of an ETF is the assets that you hold. It's not the ETF itself. The process, I think we have to explain that. We have to get them more comfortable with being … I think the phrase used is wrapper agnostic, which is if you have a solution, it can be met on a rules-based, strategic beta basis.
Ed Kershner: It can be met through an active, classic mutual fund. I think just the comfort level with this new product because we'll go back to it. They're used to thinking ETFs are benchmarks. Benchmarks trade a lot. Is my [inaudible 00:35:07] by SPDRs or QQQs? Benchmarks around solutions. They're active but they're not solutions. Solutions actually can be very liquid without having a lot of trading going on every day.
Ed Kershner: I think that's one of the key issues we have to deal with and also, this whole concept that we keep saying, I said before is wrapper agnostic. There's also other things out there. You can put them into SMAs. The package of the solution should be determined by what the advisor needs as opposed to fear of something new.
Remy Blaire: Rene, what about you?
Rene Casis: Yeah, I agree with the points he makes about being wrapper agnostic and also just, again, being focused on the solution, being focused on the outcome. I think that with the amount of active ETFs that are out there, rules-based, active products that are out there, I think one of the big challenges for advisor is just to really understand what they're actually looking to own.
Rene Casis: You hear a lot about factor-based products which are great. They're certainly supported academically in terms of how they behave over different market cycles but not every advisor has the access to models, risk models at their desktops as many institutional asset managers will tend to have.
Rene Casis: I think really, the focus in education really needs to pay a lot of attention, again, on outcomes. What outcomes are our clients looking to achieve and then to find the appropriate strategies that will meet those outcomes.
Remy Blaire: Greg, in your space, it's a little different but what are your thoughts?
Greg Collett: I actually think it's similar. I think two things. One, when I look at mutual funds. You could argue it to like 50 years for them to achieve widespread adaption, so I think part of the issue is we need to keep doing things like this and keep talking about the ins and outs of ETFs. It is still bizarrely, arguably early in the game or everybody involved in the industry has not gotten up to speed on the ins and outs, so we have to keep doing that.
Greg Collett: Two and this duck tails with points you've both made. I think part of it is on the issuers to work with clients and explain the differences between wrappers and help clients out. At the World Gold Council, we work with State Street, their own marketing agent. They have a really robust team that will work with advisors and help them through these issues, so I'd like to see issuers doing a lot of that.
Remy Blaire: Matt, what are your thoughts?
Matt Collins: Yeah, I agree completely with that. I think from an advisor perspective, they should put the burden on the product provider to educate them on what the product is trying to do, how it behaves in different environments. We look at the product provider in three buckets, right? You have your big passive providers. That's essentially just a cost scheme.
Matt Collins: They're not going anywhere. They're your lottery winner, ETF providers that are your one hit wonder. They're really interested in products but from a resource perspective, sometimes, can be somewhat narrow. Then you have some of the folks that adhere in other large asset managers come into the market. Our main value prop to advisors is our expertise.
Matt Collins: We would just ask that advisors utilize our expertise and help the advisor with the product education phase.
Remy Blaire: We're here at a Masterclass for ETFs and we've highlighted what advisors should know, focus on but when it comes to the regular retail investor, what do you think needs to be happening in terms of educating them and what are some myths that you've noticed floating out there that really bother you?
Greg Collett: I'm going to jump right in on that. The number one myth that really drives me insane and this is driven by the internet and people in, arguably, their parent's basement, writing things is that GLD does not have the gold. I have been to our vaults. We have the gold. That commentary is absolutely silly. Each share is fully backed by gold and it's a good way to get economic exposure to gold.
Greg Collett: Again, I think we just have to keep saying these things until, hopefully, folks figure it all out.
Rene Casis: For me, I think, one of the biggest myths I think that irked me is this idea that ETFs are just going to blow up one day. If volatility starts to come up and people start to sell out of an asset class. Is the ETF structure just going to break down? I think all of us have said here, in some form or another, ETFs are a wrapper. They're not an asset class. It is built upon the underlying securities that are in those wrappers.
Rene Casis: I think if investors are going to capitulate out of an asset class, they're going to do it in an ETF. They're going to do it out of their mutual funds. They're going to do it out of their SMAs. The ETF is not designed in such a way to destroy itself if those events were to happen. I do spend time speaking with clients to help them understand. Again, how the wrapper works.
Rene Casis: What are the advantages of the wrapper relative to other structures and what can they gain out of using these wrappers in their portfolio?
Ed Kershner: For the end-user investor, I just remember one of the old great quotes was don't confuse a bull market with brains. Look, rates have been going down for 35, 40 years. Piece have been going up. You have an amazing accommodate of central banks. You made some money in everything so the cheapest solution which was a benchmark was fine.
Ed Kershner: I don't think we're heading into a bear market by any means but the returns that you've gotten from equities, from bonds. I don't think they're going to be what they were in the last few decades. You need a more informed solution than simply using cheap beta, cheap … The rush to zero that's going, right?
Ed Kershner: If the cost is zero, what's the worth? Okay, so I think as you go forward, if you're trying … If Mr. Smith or Mrs. John is trying to plan for retirement, you're not going to get it from what worked over the past two, three, four decades and you're going to probably not want to do it yourself. Don't try brain surgery at home.
Ed Kershner: I think it's a lot more complicated maybe than the average individual investor knows and they're going to probably need their financial advisors who know more about this, who are going to use a better thought out solutions than the simple what worked in the past.
Remy Blaire: A lot of interesting analogies there and words of wisdom.
Ed Kershner: I live by now.
Remy Blaire: Matt, what about you? What are your thoughts?
Matt Collins: Yeah. We would love to see investors minimize how much they look at average daily volume. Average daily volume almost has absolutely nothing to do with the investment outcome that you'll get from that product, so we'd really like to see that minimized. If you think about the mutual fund structure, you put in the amount of money you would like to purchase a large cap equity.
Matt Collins: You don't know the price you paid until after dinner. In the ETF space, the focus should be on the level of transparency you're getting. You can buy an ETF at any point in the day. Get a price that represents the fair value of the securities that the fund holds, and you're done. You know exactly where you executed. You can execute other trades along with it to coincide with it.
Matt Collins: I think the focus on ETF should be what the product does most importantly, but I think understanding how to trade in ETF is certainly important. You don't just stop at the average day, average daily volume.
Remy Blaire: Each and every one of you spent a lot of time in the space and these are your straights to be able to tell people what's true and what's false in the financial news headline so if you were going to educate a client regarding these myths, what do you think is the most important for them to know and how would you convince them so that they understand what the space is really about?
Ed Kershner: I think it goes beyond the space, I'm sorry. It's more of our new cycle.
Remy Blaire: Yes.
Ed Kershner: Everything's breaking news. Most things you hear are not that important so once you figure out a solution, usually with your financial advisor, don't change because you heard breaking news. My favorite one is the market's volatile. What's normal volatility? The average daily price change for the dough is three quarters of a percent.
Ed Kershner: That means on a 25,000 dough, 200 points in a normal day. When I see the financial press says, "Breaking news, market surges 100 points." That's absurd. That's like saying, "It just lost three pounds." Well, I'm sorry I went to the men's room. It has to be relative, so I think paying attention with your advisor to what matters and trying to move away from the cacophony that we hear in the business media who's compelled by this 24-hour news cycle.
Ed Kershner: That's not an ETF advice. That's just investing advice because ETFs are part of investing.
Remy Blaire: Gentlemen, any thoughts?
Greg Collett: I fully agree with that. So much is noise and partakers are talking about retail investors. I would encourage people to tune out that noise and look into just some very fundamental principles like how an ETF works, I think is a good thing for folks to know.
Remy Blaire: Well, that brings me to my next question. For each and every one of you, if you had to describe how an ETF works, how would you go about talking about that to a novice?
Greg Collett: I'd say it's a very simple way to buy through your stock brokerage account, your securities brokerage account, other basket of assets or in our case, one asset, gold. We could start by leaving it there.
Ed Kershner: I wouldn't worry how an ETF works. If you're buying from a revenue firm, we all represent revenue firms here, you don't really wonder how your mutual fund works or anything else works. It's a way of getting a solution. It's an informed solution, okay? Why and how it works doesn't really matter. That's what your financial advisor understands but for an individual investor, your financial advisor, if they give you an advice, if this ETF is suitable for you, it's probably suitable for you.
Rene Casis: My parents asked me all the time, the thing that you're working on like how does it all work and it's the same thing. I think a lot of folks don't understand mutual funds and even if they didn't, it's really about … It's what do you own or what types of things do you own in this particular security and you can purchase it and sell it in the market just like you would, say, any individual company, right?
Rene Casis: Many people tend to buy individual stocks because they like what a company does. They like the products they make. They like the management that's in place and in this case, it's really those types of characters and themes are not that dissimilar, right? It's really thinking about this particular asset has these sets of themes present in them.
Rene Casis: It will behave in such a way in these certain economic environments. The beauty of it is that you have the transparency and the ability to transact whenever you wish.
Remy Blaire: Matt, what about you? Do you have any neighbors, family members that ask you this question?
Matt Collins: Yeah, for us, ETFs are just an open access vehicle and that plays really well with just the overall trend in our economy. People want simplicity. They don't want hidden fees. They want to be able to transact on their phone or their iPad. ETFs just play really well into that.
Matt Collins: They're an open book. You can see what they hold. You can see what you purchased it at. You can see what they charge you and you can see what it returns. I think for us, it's the simplicity of the structure even though we talk a lot about some fairly complex things. That makes ETF as an important tool for investors.
Remy Blaire: Last but not least, gentleman, before I let you go, I do want to talk about some of the trends that you're seeing in your space. What were some things that stand out to you right now and are worthy of mention?
Greg Collett: I'll jump in on that. The thing that I find most interesting that just hasn't gotten much airplay is these low-cost gold ETFs. Investors almost entirely just coming into them and not leaving so for example, we launched a fund, GLDM last June. In this roughly nine months, it's gathered over $650 million in AUM. We have one tiny little redemption of like three million a couple weeks ago.
Greg Collett: I think there are a whole bunch of investors who are now in our space, in the gold space, investing long term and they're not trying to play this game of where is gold going in the next six months and I find that interesting.
Ed Kershner: We're seeing a lot of ETFs launched. We're seeing them closed. I guess the last bit of advice I give is first of all, ask, who is the portfolio manager on the ETF? Is it a portfolio manager or is it an index maker that says, "Let's launch 1,000 ETFs and see if they buy them." At Columbia Threadneedle, our strategic beta ETFs are passive but they're rules-based.
Ed Kershner: The rules were created by the same four, five star active measures who understand their space for decades now. You can get that benefit of that experience in what, for some people, is a new wrapper called an ETF. Make sure it's an investment process. It's not an index process because we're seeing awful lot of ETFs just coming out and going away because we'll try and see if it works. That's not how you invest.
Rene Casis: I'll add to that in terms of the … I would also say that adaptive, these types of strategies, I think, are going to become something that's going to be a lot more … It's something that investors should pay more attention to. The ability to still remain focused on a certain theme or a certain exposure but for the strategy, whether it's rules-based or whether it's pure active, to be able to adapt to changes in the market environment.
Rene Casis: There's a lot of information that is impacting market prices, market levels. Again, from a risk management standpoint, I think it's crucial that a strategy can adapt to it and be responsive to those types of changes.
Matt Collins: Just on the factor side, clients are getting comfortable with factors. Sometimes, we're using single factors to overweight a segment of a market and they're becoming more and more comfortable with multifactor investing because they realized the risk of single factor investing. What's holding back, I think, the multifactor space is they still don't know where to put it in a portfolio.
Matt Collins: I don't think we fully explained it well enough to investors. We do take it one step further where our active managements, our active manager portfolios design the product but they continue to make it an active ETF so we have the multifactor approach but there's a human element to it where their understanding is what just got spit out of this machine?
Matt Collins: Does it make sense? How do I effectively trade that in the market? We hope that's an added value for investors that have been holding back in the multifactor space.
Remy Blaire: Well, gentlemen, we've covered a lot of ground on a very important topic here. Do you have any last thoughts you want to share with the audience?
Ed Kershner: No.
Remy Blaire: Okay, well, thank you very much for joining me, gentlemen. You gave us a lot of insights.
Greg Collett: Good and states result. That's fun.
Remy Blaire: Do you have any thoughts that you would like to impart?
Rene Casis: I would just say, stay focused on the outcomes. Be vigilant on understanding your risk.
Remy Blaire: Gentlemen?
Greg Collett: Diversification is key. I work at the World Gold Council because I think gold can be a good way in small amounts to diversify your stock and bond portfolio.
Remy Blaire: Matt, what about you?
Matt Collins: I would certainly say to leverage the resources that we're offering to you as an advisor.
Remy Blaire: Okay, well-
Ed Kershner: Don't be scared of ETFs. It's not a new investing. It's just a new way of packaging investing.
Remy Blaire: Well, thank you so much for joining me here. There was plenty of insights as well as helpful educational information there so thanks for joining me today.
Ed Kershner: Thank you. Thanks.
Remy Blaire: Thank you for watching. Our experts today were Rene Casis, ETF Portfolio Manager at American Century Investments, Ed Kershner, Chief Portfolio Strategist at Columbia Threadneedle Investments, Matt Collins, Vice President, ETFs at PGIM Investments and Greg Collett, Director of Investment Products at World Gold Council. From our studios in New York, I'm Remy Blaire. This has been Asset TV's ETF Masterclass.