The Last Word: Take A Deep Breath

April 01, 2020

[This article appears in our April 2020 edition of ETF Report.]

Coronavirus has created a worldwide panic, both in the markets and in day-to-day life.

Health threats aside, most of us are looking at tanked 401(k)s, IRAs and other portfolios. But it’s also true that many of us—those not retiring any time soon, at least—are going to be able to stay invested for a long time. It’s reasonable to expect that the market will recover in time for investors with retirement dates that are further out. For those investors: Have faith in diverse allocations—and in toilet paper supplies.

But there’s a big picture to consider. After all, we most likely are in a recession, and millions of Americans could find it takes years for them to bounce back from the effects, especially those not invested in the market.

And that applies to a lot of Americans. According to a Gallup poll from last year, as of April 2019, 45% of Americans polled did not have any holdings in the stock market, be it directly, through a stock fund or through a 401(k) or IRA. That figure is down from the average for 2001-2008, when 62% of those polled had some stake in the market.

Skin In The Game
The truth is, if you had some skin in the market game, you had better odds of bouncing back from the last recession.

A lot of people never did, whether or not they were invested. Now they’re being hit by more of the same, more than a decade later.

What’s different is that currently there are a plethora of apps like Robinhood, Acorns and Stash that did not exist a decade ago that allow investors with virtually nonexistent assets access to the market for free or for minimal fees. And that could be a game changer. It also has the potential to be a huge opportunity for the ETF market.

Fractional shares trading in ETFs—available across more and more venues—solves another access issue for small investors, and beginner investors can basically get exposure to the major asset classes via as few as three ETFs. And they can do it nearly for free.

Trickle-Down Effect
When it comes to ETFs, that mostly benefits the biggest issuers with the largest funds, but when new investors see good results from a basic traditional asset allocation, they’ll likely gain confidence in their ability to invest. This could in turn open the door to investments involving themes and more complex strategies mainly offered by smaller issuers. The situation may be a case where the “trickle down” effect actually works to great success.

Let’s face it: The top three issuers (BlackRock, Vanguard, State Street) have essentially cornered the market on the core asset classes—and the lion’s share of flows. Taking a 35,000 foot view, it seems like there’s little hope for smaller issuers. But the easiest way to overcome this is to offer a differentiated product.

The big issuers tend to differentiate themselves through pricing, but the smaller issuers must rely on ingenuity to get investor attention. Take the actively managed $1.6 billion ARK Innovation ETF (ARKK), with its research-intensive approach, or thematic ETFs that offer unique exposures to specific slices of the markets.

The ETF industry has been knocked for a loop, but so has pretty much everything and everyone else. That said, ETFs could help those who are able to invest even a little to get back on their feet more quickly.

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