Investors and advisors, who regularly face an onslaught of competing claims about how to achieve outperformance, have four bona fide ways to enhance returns, including behaving properly in adverse market conditions, being tax savvy, keeping costs low and rebalancing, Vanguard’s Chief Investment Officer Tim Buckley says.
In sum, these four ways of truly controlling alpha can amount to about 3 percentage points, or 300 basis points, of return each year, Buckley told advisors and investors at ETF.com’s 7th annual Inside ETFs conference. One hundred basis points are equal to 1 percentage point.
“That’s the alpha we truly believe you can control,” Buckley said on Monday to an audience of several hundred advisors and other investment industry professionals. The four-day event, with more than 1,500 attendees, is the world’s biggest ETF conference and the see-and-be-seen industry event.
Breaking each of the elements down, Buckley said being a “great behavioral coach” is probably worth 150 basis points of excess return each year. The Vanguard executive was referring to disciplines such as keeping invested when markets turn lower and continuing to put money into the market.
He estimated that being tax savvy might be worth another 60 basis points a year, while keeping costs low and rebalancing are worth 50 basis points and 40 basis points a year, respectively. Again, the four practices are worth an estimated 300 basis points a year—not a trivial amount over the arc of time.
“Whether you go for broad market exposure or go after factors, there’s no reason to go for high-cost funds,” Buckley said, preaching the quintessence of the Vanguard gospel that has helped make the Valley Forge, Pa.-based company the biggest mutual fund firm in the world, with about $2.3 trillion in assets.
Buckley was speaking on the second day of the Inside ETFs conference, which comes at a time when total U.S.-listed ETF assets are now about $1.7 trillion, just shy of a record, according to data compiled by ETF.com.
According to ETF.com estimates, ETF assets are likely to reach $15.5 trillion by 2023, at which time they are also likely to match assets in mutual funds. Current ETF assets remain below the $13 trillion in mutual funds or the $6 trillion in hedge funds.
San Francisco-based ETF.com, the leading provider of ETF news, data and research, is now offering institutional-quality ETF research and analytics for free. However, investors and advisors can still subscribe to the “ETF.com Premium” service, which includes access to our ETF analysts, the Alpha Think Tank and other benefits.
Kranefuss, The ETF Bull
Lee Kranefuss, the executive who built iShares into the biggest ETF company in the world, told Inside ETFs attendees on Sunday that adoption of ETFs would extend far beyond their current level as the virtues of the exchange-traded fund become clearer to advisors.
“We’re really at the beginning rather than the end,” Kranefuss told the meeting hall of about 700 advisors and investors on the first day of the conference. “ETFs allow advisors to do what they always did—but allow them to do it better.”
“The magic of ETFs is that they break compromises because you can adjust to the level of granularity you want,” he said, stressing that neither individual stocks nor mutual funds comes close to giving advisors and investors that level of pin-prick precision in their various asset-allocation models.
In addition to keynote addresses from Buckley and Kranefuss, Inside ETFs attendees are also hearing from a broad range of celebrity speakers both in and out of the financial world, including pro basketball legend Pat Riley, who was the luncheon speaker on Monday.
Additionally, Robert Kaplan, the American journalist, author and geopolitical strategist of the Texas-based geopolitical think tank Stratfor, addressed the conference, following an address by passive investing advocate Larry Swedroe of the BAM Alliance.
Kaplan had much to say about the evolving geopolitical situation in the Mideasst, including the changing energy picture. In the energy vein, he also noted that the liberalization of Mexico’s oil industry was likely to stoke U.S. investment in Mexico and, as a consequence, possibly create instability in oil-rich and politically unstable Saudi Arabia.
Looking ahead, the conference will also feature the celebrity economist Nouriel Roubini, former Florida Governor Jeb Bush and Wharton School Finance Professor Jeremy Siegel.
Additionally, some of the most influential women in the world of finance will be at the conference, including Sallie Krawcheck, who spoke on Monday, and Charles Schwab’s Chief Investment Strategist Liz Ann Sonders, who will speak on Tuesday.
A Complex Outlook
The conference comes at a time when investors are bracing for the much-anticipated tapering of quantitative easing, which the Federal Reserve kicked off this month.
Concerns over the pace of U.S. economic growth, and prospects for higher rates ahead, have many rethinking—and rebalancing—their exposure to both fixed income and equities.
This year’s lineup of events will include key discussions on how to best use ETFs in today’s environment, including the changing fixed-income landscape, the growing demand for smart-beta strategies—which continue to take in assets at an accelerating pace—and the role of active management in a largely passive space.
Inside ETFs takes place Jan. 26-29 at the Westin Diplomat, in Hollywood, Fla.
Credit Suisse ETN website is down for repairs.
A new index from Dow Jones and RAFI addresses a real issue.
One native of Scotland argues that because Scotland’s not broken, there’s nothing to fix.
If CalPERS is taking hedgies out, ETFs may be coming back in.