Christine Benz: Hi, I’m Christine Benz for Morningstar.com. As 2019 apprehension down, Morningstar administrator of ETF research, Ben Johnson, is calling it the “year of zero.” He’s actuality with me today to accommodate a epitomize of the year in ETFs.
Ben, acknowledge you so abundant for actuality here.
Ben Johnson: Thanks for accepting me, Christine.
Benz: So, Ben, afore we get into the zeros, let’s aloof epitomize some of the big numbers for ETFs. We abide to see absolutely able inflows into exchange-traded funds for one thing.
Johnson: Definitely. So, for the year to date through the end of November, what we’ve apparent in agreement of net new inflows into ETFs is a absolute of $274 billion in net new money advancing into the category. So, it’s on clue to potentially be the second-largest year of net new flows anytime in the history of ETFs, which dates aback to 1993. So, big year by any amplitude of the imagination, admitting I’m dubbing it “the year of zero.” Absorbing as you activate to ameliorate that $274 billion amount is that it’s for the aboriginal time anytime adorable like it’s activity to be a year area net new flows into fixed-income ETFs outstrip net new flows into disinterestedness ETFs.
Benz: And it’s been a abundant year for disinterestedness investors.
Johnson: It’s been a amazing year for disinterestedness investors.
Benz: And band investors, but beneath so.
Johnson: And fixed-income investors. It’s a acceptable year to be an broker all around.
Johnson: But what I would say is that this reflects apparently any cardinal of altered things because ETFs, actuality a actual activating vehicle, are acclimated in a aggregation of altered agency by a aggregation of altered types of investors. And I think, best notably, fixed-income ETFs are added actuality looked at as a antecedent of liquidity, a new admission of accessing the band markets for fixed-income investors who may be added acclimatized to transacting in alone bonds or baskets of bonds and accept alone added afresh gotten accustomed with and adequate with bonds captivated in an equitylike security. So, that I anticipate is a civil adventure that will abide to comedy out for the accountable future: ETFs as an admission for admission for band investors in an ambiance area array of more-traditional agency of accessing band markets and band bazaar clamminess has broiled up absolutely considerably.
Benz: How about in agreement of providers? Are you still seeing the lion’s allotment of flows go to the actual bigger firms, the Vanguard and iShares of the world?
Johnson: Absolutely. So, if you’re aloof to rank the top 10 providers by assets, what you see is that those top 10 accept accounted for 90%-plus of net new flows for the year-to-date. They annual for 95% of the $4.3 abundance in assets beneath administration in this space. So, the rich, affectionate of, abide to get richer and with acceptable reason, because they were some of the aboriginal to market. They were some of the aboriginal to bazaar with the best broadly useful, the best acceptable articles for the bigger cardinal of investors. And about speaking, they’ve connected to allotment the allowances of economies of calibration with their end investors in the anatomy of ever-lower fees. And what was absorbing to see in agreement of flows this year through the aboriginal 11 months was that two thirds of net new money, that $274 billion, went into ETFs with an amount adjustment of 10 base credibility or less. So, investors abide to be focused, abide to accurate a alternative for the actual cheapest of the bargain on the menu.
Benz: OK, and that dovetails with article you said aloof a minute ago, which is that big ample products, those are the ones area the assets are going, right?
Johnson: Absolutely. So, if you aloof rank adjustment the top ETFs by new inflows for the year to date, best of what you see is actual abundant ho-hum, bottomward the average of the fairway, absolute banal market, absolute band bazaar base exposures. That said, there’s some absorbing exceptions to that rule. Best notably, one iShares ETF, the iShares Edge MSCI USA Minimum Animation ETF, USMV is the ticker for that fund. It’s a armamentarium that we anticipate awful of. It receives a Morningstar Analyst Rating of Silver. Absorbing armamentarium to the admeasurement that it offers investors disinterestedness bazaar acknowledgment with beneath volatility. It’s got a bit of a backstop congenital into the base methodology; looks to aftermath the atomic airy portfolio it can application the MSCI USA indexes as its starting point. That armamentarium for the year to date has apparent $12.3 billion of net new inflows. So, clearly, it’s captured a lot of money. It’s captured investors’ attention. That trend is angry added recently, but I anticipate it speaks to the actuality that bodies are cat-and-mouse for the added shoe to bead here. We’ve been in a abundant bazaar ambiance for a actual continued aeon of time. I anticipate bodies are acceptable incrementally added alert as we move anytime added into the future.
Benz: Right. So, let’s get into the zeros. Let’s allocution about area we are seeing zeros. Brokerage commissions about activity abroad for ETF investors.
Johnson: Brokerage commissions activity abroad about everywhere for ETF investors if they were advantageous any to activate with. There were a lot of places area there were commission-free ETF airheaded to activate with. I appearance the abolishment of that adjustment as a absolute over the continued run for ETF investors to the admeasurement that advantageous 4.95 to barter a armamentarium is no best activity to agency into their decision. I additionally anticipate to the admeasurement that the asset managers who sponsor these ETFs were advantageous these platforms to participate in those programs, it could, in theory, abolish what was finer a abeyant floor, or at atomic an impediment to those funds’ fees activity lower over time, as they got anytime bigger. So, I appearance this as a positive.
There is the catechism of whether or not authoritative article free, accurately trading in this case, will actualize a addiction to barter added on annual of investors who now aren’t activity to pay commissions. My assessment is that–and I consistently approach my close Taylor Swift here–is that traders are activity to trade. Bodies who are absorbed to barter weren’t actuality chock-full by $20 commissions, they weren’t actuality chock-full by $10 commissions; $5 absolutely wasn’t endlessly them. I anticipate bodies who are adorable to consistently reinvest, now ETFs attending anytime added attractive, because there’s that aftermost little hindrance, abnormally as compared to, in some cases, alternate funds, that’s been removed, that makes that ETF against alternate armamentarium accommodation alike added difficult than it was to activate with.
Benz: You’ve additionally fabricated the point that maybe you’re not advantageous commissions, maybe your base armamentarium is not charging you annihilation to own it. But booty a attending about and accomplish abiding that you’re not advantageous fees about else–that you may be absolutely advantageous added fees.
Johnson: Yeah, the firms who are alms these nominally chargeless arrange aren’t accomplishing so out of the advantage of their heart. They’re monetizing your business. They’re monetizing your hard-earned assets in some way, shape, or form. So, it’s important to try to understand: How absolutely is their acquirement actuality generated off of the assets that I’ve invested with this firm? I anticipate the best important one to be acquainted of, which could be ambuscade somewhere, is befalling cost. So, the one that we’ve discussed ahead that’s been discussed added broadly is the befalling amount of foregone yield, say, on a banknote accumulation account. So, I adeptness acquire 20, 30 bps on my banknote area I could be earning 200 base points. That’s a lot of $5 trades that are nominally chargeless that I’m finer aloof giving abroad and afresh some by earning abominable yields on my banknote balances. So, I anticipate that’s one to be acquainted of.
And in added cases, I anticipate the befalling amount is alike added difficult to measure. And it has added so to do with the basal acknowledgment offered by some of these funds now area differences in fees are abstinent in a baby scattering of base points. But the differences in a lot of these funds’ long-run allotment adeptness be abstinent in allotment points. We accept no way of alive which armamentarium adeptness accomplish any bigger or worse now that we’ve controlled for fees over a continued aeon of time. So, investors absolutely now charge to cycle up their sleeves and do their due activity on the basal processes, abnormally as authentic in the case of index-tracking ETFs by their base methodology.
Benz: Right. Right. Such a abundant point. Let’s allocution about what’s been activity on on the authoritative advanced with the SEC in affiliation to the exchange-traded armamentarium world.
Johnson: Yeah, so addition big development in ETF-land this year was the SEC rule, which we’ve been cat-and-mouse on for years now. ETFs as a category, again, date aback to 1993. So, in my mind, I appearance this as affectionate of an attack by the SEC to anatomy an eggshell about what is now a absolutely developed craven in the ETF category, which is abundant because it brings a accepted set of expectations of guidelines, of behavior about what is an ETF and what is not an ETF. So, there are a ample cardinal of ETFs as we apperceive them today and a beyond cardinal still of assets that are absolutely in funds that are alfresco of this new SEC rule. But I anticipate the important affair for investors is article that we advocated for in our own animadversion letter to the SEC was to akin the arena acreage for issuers with account to the use of custom baskets. So, these baskets, conception and accretion baskets, are how stocks and bonds move into and out of ETFs’ portfolios. Historically, alone a baddest subset of ETF providers could adapt those baskets, to cut them to fit, to abbreviate tax implications of redemptions from the fund, for example. This adeptness has now been afforded to all ETF providers. And I anticipate from an investor’s perspective, that’s a abundant affair because it creates a akin arena field, a accepted set of expectations, and could crop greater tax ability for a cardinal of altered types of ETFs and, I think, alive ETFs in particular. So, it added bolsters that key hypothesis that’s absolutely ambrosial for taxable investors.
Benz: Ben, abundant perspective. It’s consistently agitating to apprehend your thoughts. Thanks for actuality here.
Johnson: Thanks for accepting me.
Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.
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