The good news: There’s still a lot of money flowing in, but the industry is maturing
The ETF giant continues to rake in money and now manages assets worth over $8 trillion. Indexing/passive investing, the main driver of ETFs 30 years ago, continues to attract new followers as smarter investors, including younger ones who have started investing since the pandemic, understand how difficult it is to outperform the market.
The bad news is that much of the easy money has already been made as the industry now reaches middle age. Almost every type of index fund you can imagine already exists.
To grow, the ETF industry needs to expand active management offerings and find new ways to attract investors.
Actively managed strategies performed well in 2023, accounting for about a quarter of all inflows. Covered call strategies like the JPMorgan Equity Premium Income ETF (JEPI), which offered protection during a downturn, made money. But as broad markets reach new highs, it’s not clear whether investors will continue to put money into covered call strategies, which by definition underperform in rising markets.
Fortunately, the industry has proven to be very adept at capturing the current investing zeitgeist. These can range from the silly (pot ETFs when there wasn’t a real cannabis industry) to ideas that really had staying power.
Six or seven years ago, it was thematic technology ETFs like cybersecurity or electric vehicles that attracted investors.
The big topics in 2024: Bitcoin, AI, Magnificent 7 alternatives
In 2024, the industry expects the new generation of Bitcoin ETFs to raise billions. Bitcoin for grandma? We will see.
Besides Bitcoin, the big topics here in Miami Beach are 1) AI and what it will do for financial advisors and investors and 2) how to get clients to think about stock allocation beyond the Magnificent 7.
What is striking is that there is no investment in China.
Bitcoin for grandma? Financial advisors are divided on whether to intervene
Ten spot Bitcoin ETFs have been successfully launched. The heads of three of them, Matt Hougan, chief investment officer at Bitwise, Steve Kurz, global head of asset management at Galaxy, and David LaValle, global head of ETFs at Grayscale, will lead a panel that offers advice to financial advisors who seem as divided as it is continues.
Ric Edelman, the founder of Edelman Financial Engines, the country’s leading RIA and current chairman of the Digital Assets Council of Financial Professionals (DACFP), will also be in attendance.
Edelman has been a long-time Bitcoin bull. He recently estimated that the price of Bitcoin will reach $150,000 within two years (about three times the current price) and estimated that independent RIAs, which collectively manage $8 trillion, will reach $150,000 in the next two to three years .5% of their assets under management could be invested in cryptocurrencies for years, which would mean over $154 billion.
So far, inflows into Bitcoin ETFs have been modest, but some advisors see Bitcoin ETFs as the first real bridge between traditional finance and the crypto community.
Yet many advisors are hesitant to recommend them, not only because of the large number of competing products, but also because of the legal minefields that still exist around Bitcoin, particularly SEC Chairman Gary Gensler’s warning that any financial advisor who uses Bitcoin recommends being cautious about “suitability” requirements for clients.
For many, these eligibility requirements, along with high volatility, ongoing allegations of manipulation, and doubts about Bitcoin as a bona fide asset class, will be enough to keep them away.
The Bitcoin ecosystem is in overdrive to convince the RIA community otherwise.
Artificial Intelligence: What Can It Do for the Investor Community?
Thematic technology investments (cybersecurity, robotics, cloud computing, electric vehicles, social media, etc.) have waxed and waned over the last decade, but there is no doubt that artificial intelligence ETFs (IRBT, ROBT, BOTZ) have regained some interest . The problem is defining what an AI investment looks like and which companies are exposed to AI.
But the effects are already being felt in the financial advisory industry.
Jason Pereira, senior partner and financial planner at Woodgate Financial, talks about how financial advisors are using artificial intelligence. There are amazing AI tools that financial advisors can use now. Pereira describes how it is now possible to create financial podcasts using only snippets of your own voice. Simply enter text and an entire podcast can be created without ever saying the actual words. How do I create text? In theory, you could go to Chat GPT and say, for example, “Write 500 words on current topics in 401(k)s” and rewrite it slightly for a specific audience.
How do you maintain values in a world where a million people can now create a podcast about financial advice? Many of the lower-skilled tasks (data analysis) will quickly become commodified, but Pereira believes there will quickly be a very big difference between volume and quality.
Stock allocation beyond the magnificent seven
Financial advisors are besieged by clients urging them to throw money at the Magnificent 7. Roundhill’s new Magnificent 7 ETF (MAGS) has made a lot of money in the last few months, now over $100 million in assets under management.
Since the end of last year, there have been huge inflows into technology ETFs (Apple, Microsoft, NVIDIA) and modest inflows into communications (Meta and Alphabet) and consumer discretionary (Amazon). Almost everything else has stagnated, with particular outflows in energy, health and materials.
Advisors are eager for advice on how to talk to clients about the concentration risks associated with investing solely in big-cap technology and how to invest for the long term.
Alex Zweber, Managing Director of Investment Strategy at Parametric, and Eric Veiel, Head of Global Investments and CIO at T. Rowe Price, lead a panel on alternative approaches that have seen some recent success, including ETFs built into options overlays investing, but also to quality and momentum investing in general, which overlap but are broader than just investing in the Magnificent 7.
Stop talking about numbers and returns and instead offer “people-centered” advice
If you talk to a financial advisor for more than a few minutes, they’ll probably tell you how difficult it is to deal with some clients who are convinced they should put all their money into NVIDIA, or Bolivian tin mines, or the ADHD have and want to invest, putting all your money into an investment one day and getting it out the next.
Brian Portnoy and Neil Bage, co-founders of Shaping Wealth, lead one of the first panels on how financial advisors can move from focusing on numbers to engaging with their clients in a more personal and emotional way.
Sounds tricky, but competition for clients has become more intense, and a new area of financial advice delivery is emerging that focuses less on numbers (assets under management, fees, quarterly statements) and more on developing investor understanding of behavioral finance and emotional intelligence.
This type of investment advice, often referred to as “human-centered” or “human-centered” advice, may spend more time discussing behavioral biases that lead to investing mistakes than on details about the stock market. This can help clients develop behaviors that are better suited to longer-term investing, for example (less trading, less market timing).
Proponents of this approach believe it is a much better way to engage and retain customers in the long term.
What is missing? China
For years, a panel on international investing, and in particular investing in emerging markets/China, was a staple at ETF conferences.
No longer. Remarkably absent is any discussion of international investing, particularly China, where political risk is now considered so high that investors are fleeing China and China ETFs.
Indeed, investing “ex-China” is a trifle.
The iShares Emerging Markets ex-China ETF (EMXC) launched quietly in 2017 and managed almost no assets for several years. That changed in late 2022 as China ETFs began a long, slow decline and inflows into EMXC exploded from investors who still wanted exposure to emerging markets, just not China.