Take a look at the chart below. It’s a chart of the VIX (a measure of volatility) going all the way back to the end of the financial crisis in 2009.
We overheard another discussion on the future of the ETF industry this week. Here it is in a nutshell: “Low cost, beta exposure. Cost is the only thing that matters. Everybody should just index.”
Flows are telling the same story. Check out this tweet from Eric Balchunas showing the dominance of low cost beta – it’s absolutely nuts:
ETFs took in just under $250b in first half of 2017, just shy of annual record. Here's top 25, all but one is a BlackRock or Vgrd product.. pic.twitter.com/52tEz5QXc9
— Eric Balchunas (@EricBalchunas) June 30, 2017
Here’s my question – Should we expect something different given the chart of the VIX above? Think about the last 8 years – there’s been almost ZERO volatility and the broad market indices have gone up, up and more up. Anything that is not market cap weighted, pure index exposure has trailed its benchmark…just read the latest SPIVA report. Investors and advisors are behaving as expected. What’s performed the best? The index…let’s own that. ETFs offer the cheapest, most effective way to gain access to what’s performed the best. Money follows performance. Couple that with the big dog issuers marketing like crazy, revenue sharing their faces off, and slashing prices – what you get is a stampede to cheap beta.
Yes, I think assets will continue to flow to cheap beta, the ETF takeover is just ramping up and cheap beta will continue to be the biggest part of that. I’m not saying that’s a bad thing. My point is that the environment has more of an impact on flows than anything else. At some point, Mr. Market will dictate a need for something other than cheap beta. Who knows when or what that will look like. If enhancing investor outcomes is the objective, cost only, is not the be-all end-all. Risk management, over and above diversification alone, plays a part in accomplishing that objective. While it’s been unnecessary for nearly a decade, we are still dealing with the stock market which does not always produce risk-free returns.