ETFs are like family to me. I've spent most of my career in the ETF weeds, and for what felt like pretty noble reasons: they've made investing cheaper, easier and more transparent. For everyone!
But as an ecosystem — a community of issuers, market makers, exchanges, index providers, pundits, media, data providers, lawyers and more — we've gotten awfully good at putting things other than simple stocks and bonds in ETFs, and a little less interested in whether they're actually any good.
At Future Proof in Huntington Beach last week, I tried to squeeze that argument into a 16-page zine and 15 minute talk. Here's a written version.
The State of Things
By my count, 1,508 U.S. ETFs launched in the twelve months through August. That's about 29 a week. You cannot give every new ticker a thoughtful afternoon. There aren't enough afternoons.
This seeming abundance isn't just targeting degenerate retail, it's also targeting advisors. A killer Q2 AdvizorPro's study of 5,400 RIAs found the average RIA has grown their approved/used list from average ETF from 88 to 93 tickers. Adding 5 funds over the course of a year may not sound like a big deal, but every new ticker is a real, different thing that somebody has to understand, explain to clients and monitor.
This is counter to the what advisors have been saying they want for years: fewer, deeper relationships. It's not that I don't believe it when an advisor tells me they want to pare down their inbound wholesaler schedule, it's just that, honestly, as a group, advisors aren't doing it. Instead, the industry's product development onslaught has become advisor homework.
And what are y'all buying? Well it's not just cheap beta anymore. It's active. It's derivatives. It's income. It's alts. It's everything.
For years, fees offered a useful shortcut through the ETF Big Box Store: when in doubt, buy cheap. But FactSet's Elisabeth Kashner found higher-fee funds gaining share in five of ten active segments — and active is what's been getting flows. Obviously, folks pay up when they think something's useful, so the question is, what are people paying for?
I tend to think of ETFs as just another packaged service: if I want broad and boring exposure, well, i want it cheap and well designed. If I'm handing off portfolio decision making, or looking for a weird payout pattern? Explain why you're earning that fee.
Options!!
One place where advisors are definitely paying up is anywhere options are used. As Todd Sohn of Baird Strategas points out, the math is legit. A pretty standard equity income product like JP Morgan's JEPI offers a 7.6% indicated yield with 8% volatility, against TLT's 4.8% and 14%. These are not stupid people opting out of Treasuries.
Story Continues