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Weekend reading: ETFs are playing to the active crowd

Weekend reading

Good reads from around the Web.

I don’t know about you, but the new iShares Exponential Technologies ETF has a sort of end-of-days feel to it to me.

Are investors really clamouring to put money into a basket of stocks exposed to:

“…robotics, artificial intelligence, machine learning, nanotechnology, bioinformatics, sensor technology, financial services innovation, energy and environmental systems, neurosciences and of course, medical sciences…”


The ETF amassed $600m assets in just a couple of days – more than enough to propel it clear of the ETF dead pool for now.

That seems a little frenzied, certainly. But according to ETF.com nearly all of the initial money came from the firm of the ETF’s promoter, Ric Edelman.

And Edelman has only invested a relatively small 4% of Assets Under Management into his brainchild.

So perhaps not quite DotCom 2.0… yet.

Not your father’s ETF investing

It’s worth remembering all these bespoke ETFs when contemplating the growing popularity of exchange traded funds, as illustrated in this graph from MorningStar:

Click to see ETF AUM growth in widescreen!

Click to see ETF AUM growth in widescreen!

Source: MorningStar

Conventional index funds and ETFs are both taking market share, sure.

But the explosion of ETFs is particularly marked in the sector-based category.

And this demand comes from active investors who are holding baskets like the Exponential Technologies ETF in place of shares in individual companies.

Or perhaps that should be “trading” rather than holding – because ETFs are also widely employed by hedge funds and the like to dial their exposure up and down on a dime.

It’s all why Vanguard’s Jack Bogle is skeptical about ETFs, of course. Bogle believes they are a gateway drug into active investing.

But most of Wall Street and The City isn’t concerned about what’s right for investors – more about what they can sell investors.

Not for nothing was posterchild Goldman Sachs described as:

“a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Indeed, Goldman created the new Exponential Technology ETF, along with iShares owner BlackRock.

And why shouldn’t it? Financial engineering is part of Goldman Sachs’ job.

But it’s our job to decide the best way for us to invest our own money – which for the majority will be to ignore the whole hullabaloo and invest passively instead.

Big bucks for ETF wizards

That said… if you can’t beat them, maybe you could join them?

No, no, I don’t mean becoming a silly active investor chasing rainbows. We know most attempts at active investing fail to beat the market.

I mean getting a job dreaming up your own weird and wacky ETFs.

There’s a “battle for ETF brains” going on, reports the FT [Search result]:

Mutual fund shops are on the hunt for people with a track record of building products and relationships in the exchange traded fund market and are likely paying big bucks for that know-how.


I’ve actually got my own idea for an ETF. It would be a sort of world equity index tracker fund, that simply holds as many stock market-listed companies from across the globe as possible while also keeping costs low.

Do you think it will catch on?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Parents can switch their kids out of old-fashioned Child Trust Funds and into more flexible Junior Isas from Tuesday. The Guardian surveys the options.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

Active investing

  • Swedroe: Writing puts is a terrible strategy – ETF.com
  • Housel: Markets change. So should you – Motley Fool (US)
  • Managers who eat their own cooking tend to do better – MorningStar
  • Neil Woodford on avoiding future turmoil – Telegraph
  • Remembering the rise and fall of Drexel Burnham – Bloomberg

Other stuff worth reading

  • New pension freedoms: Six things not to do on Monday – Telegraph
  • 5 scenarios where annuities are still the best bet – Telegraph
  • [Flimsy] case against taking a 25% tax-free pension lump sum – ThisIsMoney
  • Where your £9,000 a year childcare bill goes – Guardian
  • Has the housing crisis reached a tipping point? – Guardian
  • How the Internet turns us into masters and servants – Medium

Book of the week: Carl Richards – that bloke who draws those neat cartoons about money and investing instead of waffling on for 1,000 words like I do – has a new book out. The One-Page Financial Plan was aimed at a US audience, but early reviewers say there’s plenty for UK readers, too. Not surprising – the genius of Richards’ work is that some of it could be understood by a precocious caveman.

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  1. Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 12 comments… add one }
  • 1 Retirement Investing Today April 4, 2015, 12:31 pm

    I’m with you TI. I can’t help but feel that by the time the demand (read popularity) is there to make these specialist ETF’s worthwhile for the giant squid/Blackrock that the smart money will already be in. The punters are then able to buy in just in time to be guaranteed some under performance while the big gains are then occurring in the next big sector.

    I’ll stick with your “world equity index tracker fund” but I’ll also add some bonds, property, gold and even a little cash so that I’m sure to at least get some of the next big thing. I’ll then rebalance at mechanical intervals so I’m “selling” the current best thing and maybe even “buying” the next best thing. I’ll then focus on minimising the taxes and expenses associated with the portfolio to maximise what stays with me. Complicated? No. Boring? Yes. Proven to be successful for me? Yes.

  • 2 M from There's Value April 4, 2015, 2:08 pm

    I agree with you too… and Bogle. I am very sceptical about ETFs, and thus have never bought a single one. I feel like with the hedge funds liking them a lot, I should be even warier and predict doom and gloom to all and sundry.

    However, within the very high tech super-duper fancy stocks the above mentioned ETF may contain may lie something along the lines of new algorithm-based protections for assets… Have a little look at this company and see what you think: http://www.algodynamix.com/solutions/


  • 3 Grumpy Old Paul April 4, 2015, 4:06 pm

    The only ETF I hold is Vanguard (pace Jack Bogle) FTSE 250, the role of which is to reduce over-exposure to the top 10 UK companies by market cap which would result from holding a FTSE All-share tracker alone.

    It also presumably captures an element of small-cap (somewhat) premium and the Cass study results on selecting shares at random!

    I use an ETF rather than a fund because the platform charges are more favourable and I’m still nervous of switching platforms.

  • 4 dearieme April 4, 2015, 5:00 pm

    “case against taking a 25% tax-free pension lump sum”: unless the TFLS is so big that the money left over after clearing your debts and buying your treats is too big to bung into ISAs quickly, then I’m not convinced.

    I suppose that the inheritance tax avoidance argument is legit, but for many people the best procedure might be to take all the TFLS and just leave a compensating part of the 75% behind for the kidiwinkies.

    A major disadvantage of pensions is that the money is hostage to fortune within the pension until you extract it. No doubt Mr Balls has plans to reinforce that lesson in the nearish future.

  • 5 dearieme April 4, 2015, 5:04 pm

    Just to add (for people of the right age and in good health): it’s hard to imagine a better investment than taking your TFLS and living off it while you defer your state pensions. It’s almost equivalent to buying an index-linked annuity that returns 10% p.a.

  • 6 Gregory April 5, 2015, 11:10 am

    Love the manias and popular, fashionable things like newer and newer ETFs! Would Buffet so rich if everybody was rational?

  • 7 The Investor April 5, 2015, 4:52 pm

    Just to be clear, I’ve nothing against ETFs per se. I think it’s perfectly fine for the physically-packed ones to make up some sizeable portion of your passive portfolio (for more on why I say “some portion”, please see my posts on investment failure the other day. 🙂 )

    However I do think questionable innovation is being driven by the active crowd, and that Bogle is right — that many people will end up trading ETFs or otherwise getting cute with them due to their resultant over-fiddly portfolios, weird sector additions, panicking when something goes down that they wouldn’t have noticed in a less granular DIY portfolios, and so on.

    So much of good investing is down to good behaviour, as much as what you hold or how you hold it. This is something I struggle with all the time as a should-know-better active investor, but it’s an equally big issue for passive investors.

    For instance, you can have a ‘passive portfolio’ made up of 10 ETF funds but if you notice your EM one is down 20% and you know you can make the pain ‘go away’ with by selling the ETF in 3 seconds, the fact is plenty of hitherto passive people will at that point fancy getting active and dumping it, whatever they might think reading this in the cold light of day…

    That’s a big part of Bogle’s issue with ETFs. He thinks even the vanilla ETFs open the door to and encourage that sort of thing — even leaving aside the Frankenstein quasi-active sectorial multitudes that are springing up everyday.

    Of course it’s up to us to have a plan and stick to it, implementing it through the most appropriate tools — and turning to Netflix or similar instead of the trading screen if we’re tempted to go against the plan for emotional reasons…

    @dearieme — Yes, I said flimsy for a similar reason. Then again I do hold IHT dodging in far lower esteem then almost anyone else in the middle classes I know!

  • 8 ermine April 5, 2015, 7:13 pm

    the new iShares Exponential Technologies ETF has a sort of end-of-days feel to it to me.

    I’ve seen this movie before, and there’s no happy ending

    Ishares TMT – launched in 2000 🙂

    Closed 2003 bwahahahahaha – how do I know, I was there…

  • 9 @algernond April 5, 2015, 7:59 pm

    Hi. Sorry for slightly off-subject question (although link to Guardian article on CTF transfer to Junior ISA is in the weekend reading list).
    Does anyone know if, from 6th April, a Junior Cash ISA can be opened before transferring the CTF to Junior shares ISA ?

  • 10 Peter April 6, 2015, 8:23 am

    As I understand it, your child can hold a CTF or JISA not both.
    So you need to transfer CTF to JISA provider, the CTF is closed on transfer and then you can contribute to the JISA in this tax year. I am in the same position, so just waiting on some transfer forms.

  • 11 SemiPassive April 6, 2015, 1:37 pm

    ISAs for Pets (PISA) would have been a good April fool, maybe next year…

    Anyway, praise for the idea of ignoring niche sector-specific ETFs. I hold 6 equity ETFs at present, but all physical-replication of mainly broad indices. While they allow one to set a genius-like perfect tilt between UK, World, Emerging Mkts, large cap, mid cap and dividend yield (thats bad enough, I know) there are no industry sector specific ones.

    I know its wrong but the added boon of being able to liquidate my entire portfolio – should I get a premonition of an end of days meltdown -helps me sleep at night, whereas taking 4 days to sell funds with no idea what price you’ll get for them didn’t.

  • 12 @algernond April 6, 2015, 11:15 pm

    Peter – So irritating. Seems like only HL have got their forms sorted out so far, but certainly don’t want to use them with their 0.45% fund fee (using ETF’s too much hassle for JISA).
    1.5 years of waiting until 6-April-2015, and still have to wait more !

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