‘ETF Industry On Fire’

February 08, 2011

Myriad advisors at this year's 'Inside ETFs Conference' said they’re basically done with mutual funds and are looking to segue into ETFs.

They admit they still love to tell their clients that one of the managers of an active mutual fund they’ve picked is outperforming. But they also seem like they’re done with the guesswork. It appears that the losers are outnumbering the winners, and they’re done with the difficult phone calls they invariably have to make when they’re getting out of a losing or underperforming position.

They’re ready to offer their clients the lower expenses of index ETFs and, when it’s appropriate, integrate a tactical allocation piece to their approach using a sector fund. Between the cheaper costs and better performance that index investing enjoys over active management, it seems like the no-brainer may be about to go parabolic. (In case I’m coming off too strongly, understand that I’m not writing an obituary to the mutual fund industry or active management, but finding the next Warren Buffett has been, and will always remain, something akin to finding a needle in a haystack.)

In any case, decisions that are favoring indexing and ETFs over active management reflect what the numbers tell us, and it pleases me to get the sense that advisors are starting to not only realize this, but are also doing something about it.

Investment Revolution

Listening to stories like this, I feel like I’m living and breathing the arguments that course through “A Random Walk Down Wall Street,” Burton Malkiel’s classic book that helped spawn an investment revolution.

Malkiel’s view is very simple: There’s really no better way to earn returns in the stock market than owning cheap index funds. By the way, the 10th edition of his seminal work is out this year, and in the latest edition Malkiel is polite, but undeterred, by critics who argue, in part, that the market meltdown of 2008-2009 amounted to a repudiation of the efficient markets hypothesis on which much of his argument rests.

Among some of the other advisors I’ve met here at the conference was one gentleman who chose the highway instead of “Merrill’s Way,” to turn that cliché in the financial-advisory business on its head.

The highway—or rather his way—turned out to be founding his own advisory firm and guiding his clients to cheap and effective ETFs—precisely the sort of business development plan he tried at Merrill Lynch and that flew in the face of the sales-driven orthodoxy of the wire house world. And that was 10 years ago.

My hat is off to him for having the courage to forge forward with what was then a downright revolutionary approach to managing clients’ assets. As I’ve blogged about before, I got my share of rolling eyes when I was at Smith Barney two years ago and decided without equivocation that ETFs were the cheapest, most sensible way to act in a clients’ best interest.

The other thing that has struck me about this conference is that there are a lot of people here.

The count is about 1,000 people and, at the risk of sounding like I’m tooting IndexUniverse.com’s horn, it seems like the “Inside ETFs Conference” has become something of a see-and-be-seen event for the ETF industry.

I’ll leave you with an anecdote to illustrate my point: Somebody told me last night, in strict confidence, as we shared cocktails aboard one of those yachts at events like this that never leaves its moorings, that if the mutual fund industry had managed to sink that yacht, it might have succeeded in obliterating the ETF industry. It was a good one, and there’s always a bit of truth to a good joke.



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