I'm back in New York. And what a pleasurable first day to see Burton Malkiel at an (urp) ISHARES event. There he was espousing the benefits of ETFs to a significant gathering of the New York financial media.
I guess this all originated from Malkiel's review of his friend John Bogle's new book that appeared in the Wall Street Journal recently. In it, Malkiel says that Jack has it all wrong in his venom on ETFs. Malkiel says they're inherently more tax-efficient and cost-effective, as well as being great mitigators of the negative effects traders can have on funds.
It's not a new debate I guess...but it's a bit jolting to see Burton at an iShares event touting the benefits of ETFs (and then mostly talking about China in a very compelling way). We know that Vanguard and iShares are fierce competitors and I know that the iShares folks have long been a little peeved at Mr. Bogle's attacks on ETFs. So you can't help but think that having Burton do an iShares event in front of the national media didn't involve a little jabbing in Vanguard's direction.
Anyway - I've done a lot of these events...and iShares certainly does do them well. The assembled speakers talked about all the right things (focus on asset allocation instead of sector rotation, etc.) Also, iShares seems like it may be taking a serious run at the 401(k) business in its partnership with BenefitStreet, which appears to be a serious undertaking really aiming at lower cost. Lets keep an eye on that. Maybe 401(k) plans have some hope afterall, though I'd rather just scrap the whole system and make the platforms open.
Probably the most interesting thing at the event was the presentation by Philippe El-Asmar, who uses the windy title of Managing Director, Head of Investor Solutions, Americas at Barclays Capital. Barclays Capital partnered with iShares on the iPath development, and they have really been trotting Philippe out recently.
I was very carefully attuned to this presentation, since as I've mentioned in this blog, I think that the ETN structure could have the potential to completely alter the exchange-traded product business, particularly in the areas in which they've been launched (commodities and currency) which are heavy on dividend and short term tax consequences.
Philippe was pretty unequivocal about the proposition that the longterm cap gains treatment would hold up to IRS scrutiny...something that for taxable accounts would seem to me to make existing commodities ETCs in the U.S. obsolete. You'd think that the issuer risk, which I take as neglibible would be wildly outweighed by tax benefits for a taxable investor.
El-Asmar's point was that they have a strong legal opinion on the subject from Sullivan and Cromwell on the subject, and more importantly, that institutional investors have been taking the same long term capital gains treatment for identical notes and swaps for years. The iPath products are just more visible. So we may buy a few shares and take it to the IRS for review and then write an ETFR story that would hammer that down one way or another.
Though I know the IRS rulings are not binding or necessarily consistent, I would think that a firm ruling and our publication of the result would help to settle things.
We'll leave that for another day. Got to run...