Inside look: What to watch at Morningstar ETFs 2016

Posted by on

ETF investors, issuers and enthusiasts will be converging on Chicago tomorrow for the annual Morningstar ETF Conference, and Gregory FCA will once again be present. As we prepare to travel to the Windy City to immerse ourselves in the complicated, exciting, ever-evolving world of ETFs, we asked three of our industry connections who will also be there to shed some light on what conference attendees can expect, the trends they are keeping a close eye on and the challenges that will soon come to a head.

  • Ben Johnson, CFA, Director of Global ETF Research at Morningstar (@MstarETFUS), and panelist on the Meet the Pundits panel, presenter of Morningstar Manager Research Highlights and Opening Remarks, moderator of Multifactor ETFs are Multiplying panel
  • Robin Wigglesworth, U.S. Markets Editor at Financial Times (@RobinWigg), and moderator of the Meet the Pundits panel
  • John Waggoner, Senior Columnist at InvestmentNews (@JohnWaggoner)

What are you most looking forward to at Morningstar ETFs this year? Are there any panels that stand out as a must-see?

Ben Johnson

Ben Johnson

Ben: As is the case with all of Morningstar’s global conferences, content is king. Our goal is to build an investor-centric agenda. This year, we will begin by setting the stage and providing our audience with expert insight into what is going on in the broader economy. There are few that are as well-suited for this task as Charles Schwab’s Liz Ann Sonders. She does a terrific job of covering all facets of the current macro environment, ranging from the Fed to the jobs situation to what’s going on overseas. From there, we’re going to dive into the weeds and touch on interesting topics that get into the white-hot center of what’s going on within not just the ETF arena, but the asset management space at large. Specifically, we have a trio of general session speakers that will cover issues around what we call strategic beta. Some must-see speakers are Ronen Israel and Jason Hsu. Also, I’m really excited to have Patrick O’Shaughnessy of O’Shaughnessy Asset Management on the agenda this year. Patrick is going to cover a topic he wrote about in a piece called “Alpha vs. Assets,” which is about the inherent conflict between generating alpha and the fact that it’s difficult to do in a large-scale format.

One of my favorite panels every year is the “Meet the Pundits” panel. The Financial Times’ Robin Wigglesworth is moderating the panel with Inside ETF’s Matt Hougan, ETF Trends’ Tom Lydon and myself. It will be a no-holds-barred discussion covering a wide range of topics.

John Waggoner

John Waggoner

John: Morningstar has a nice lineup this year. Liz Ann Sonders’ outlook is certainly a must-see, and I’m looking forward to her thoughts on the election and market volatility. The breakout session on Thursday on value and momentum strategies looks good, especially as they pertain to smart beta products. I’m looking forward to the panel on low-volatility strategies, particularly in light of those funds’ popularity this year. And I’ll be sure to catch the emerging markets panel. I’ll certainly see the panel on harnessing momentum, as it’s been the investment management industry’s version of the Northwest Passage for many years. After that, I plan to collapse in a crumpled heap

Our take: As financial news buffs closely following the robo-adviser phenomenon, we are especially excited about the panel on how technology is shaping the future of advice. With all the talk surrounding how robo-advisers stand to impact the industry, we are interested to hear Wela CEO Matt Reiner’s insight on how this technology can be used as an advantage.

Additionally, we’ve marked our calendars to attend the panel discussing ETF strategists’ infiltration of the retirement market. The double-whammy of an aging population and increased adoption of ETFs by retail investors will make for a thoughtful, spirited discussion.

For the full agenda, visit this link.

Low-volatility strategies, thematic ETFs, active vs. passive debate — what trends are you watching in the ETF space? How do you expect them to evolve over time?

Ben: The total number of U.S.-listed ETPs stands at about 1,950. But despite there being nearly 2,000 options, the largest 100 capture the bulk of investors’ precious capital. So while we’re seeing a record number of new products come to market, most money continues to flow into tried-and-true, dull, boring, dirt-cheap ETPs. That said, it hasn’t affected the pace of new product development, as new and existing providers continue to throw ideas at the wall to see what sticks.

Another interesting topic is the ongoing attempts by asset managers and others to clear the logjam on the active side of things and develop a broadly-appealing active ETP chassis.

And we’re of course eager to explore all things strategic-beta related, be they individual factor funds, low-volatility funds or multi-factor funds. Low volatility funds have been gathering assets hand over fist, and we’re paying close attention to valuations for these strategies.

Robin Wigglesworth

Robin Wigglesworth

Robin: I’m currently watching the growth of passive in fixed income, an area it arguably makes far less sense. The growth of factor ETFs is also interesting, especially wildly popular ones such as low-vol. I try to keep an eye out for inflection points in the performance of factors.

John: I’m still trying to understand the advantage offered by an active ETF, other than the fact that you can bail out of one during lunch. I think low-volatility strategies were a very good investment in January, but may be overvalued now. To be honest, I think there’s an air of desperation among ETF producers, and that as more ETFs roll out, newer funds have a diminishing value to investors.

Our take: As a top financial PR firm, we’ve worked with dozens of ETFs over the years and make it a priority to stay abreast of the latest developments in this industry.

We are closely watching the increasing number of specialized, thematic ETFs being brought to market every day. Investors now have a variety of options when it comes to constructing their portfolios. Is there room for all of these funds in the ETF universe? Only time will tell.

Additionally, the increased regulatory environment will continue to present challenges for issuers and fund managers. How firms adapt to changes in operating and trading practices, as well as new sales and distribution methods, speaks to how they will stay one step ahead of their competition.

What do you consider to be the most challenging issue facing the ETF industry today?

Ben: The industry at large is facing a bit of an identity crisis. The prevailing winds are all blowing strongly in a very investor-friendly direction and this is presenting real challenges for many asset managers. Fees are under pressure and that shows no sign of abating. The value-add of traditional asset management shops ─ at least the perceived value add ─ has been called into question. People are looking for broadly diversified, very low-cost market exposure. Providers are facing challenges as they in some cases fight to justify their very existence and in other cases validate the premium fees they are charging. Most asset managers are asking how they can lean into what are headwinds for them but are tailwinds for the investors that are their clients.

Robin: The fact that there aren’t many challenges is a meta worry. Everyone has seemingly accepted the thesis in favor of passive investment, and the ETF space is growing so quickly and aggressively that mistakes are almost certainly being made. Such as the structuring of silly, gimmicky thematic ETFs, ETFs backed by increasingly illiquid underlyings, or factor ETFs that simply don’t do what it says on the tin. Almost inevitably when growth is this strong, dumb stuff happens.

John: Overpopulation. Does anyone really need an inverse VIX fund, or a small-cap Korean ETF? Probably not. 

Our take: We’re at a turning point in the industry – investors are no longer asking, “What is an ETF,” but rather, “Is an ETF right for my portfolio?” With that awareness comes a magnifying glass on the way ETFs operate, their liquidity, their place in the market and inflows/outflows. The industry will likely face threats that are not even anticipated yet. For example, last year’s “flash crash” led to an increased scrutiny of the mechanics behind ETFs. What remains to be seen is whether the industry can learn from its mistakes and prepare for future challenges.

Be sure to follow Gregory FCA’s conference representatives Joe, Lauren and Jess on Twitter (@JoeAnthony @L_McCormack and @JessKEmery) for up-to-the-minute updates from the conference and key takeaways that ETF managers, issuers and investors should be aware of.  We’ll be tweeting using #MStarETFUS.

This post is a collaboration between Jess and another member of the Gregory FCA team, Lauren Davis.