The Institutional ETF Toolbox

How Institutions Can Understand and Utilize the Fast-Growing World of ETFs

Eric Balchunas

• Publisher: Wiley
• Year: 2016
• Print ISBN:
  9781119093862
• Edition: 1
• eBook ISBN:
  9781119094241
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Get up to speed on the booming innovation surrounding institutional ETF usage.

The Institutional ETF Toolbox is the institutional investor's guide to utilizing exchange-traded funds and taking full advantage of the innovative new products in their expanding repertoire. The ETF toolbox is expanding rapidly with nearly one new ETF launching every day this decade so far. As with any financial innovation, this phenomenon brings both opportunity and concerns, as well as a dire need for clarity and strong due diligence skills.

This book is both reference and resource, providing data-driven explanations backed by real-world market examples—alongside valuable insight from leading practitioners. Coverage includes an examination of the advantages and growth of ETFs as well as current and future uses of ETFs, emerging markets, and the strategic and tactical perspectives you need to effectively use ETFs to optimal effect. The major concerns surrounding ETFs are addressed in full to give you the background you need to formulate a better ETF strategy.

ETF allocations are expected to keep growing rapidly across all institutional types, and new and emerging products are becoming more and more liquid allowing easier expression of investment opinion. This book shows you how any investors can utilize these tools to strengthen your portfolio and safely expand into particularly appealing areas.

• Understand how the ETF ticks and the how to take advantage of all the myriad of advantages
• Learn how to perform effective due diligence using exposure, cost, liquidity, risk and structure
• Utilize ETFs for cash equitization, portfolio rebalancing, liquidity management, and more
• Learn how ETFs are expanding into equities, fixed income, emerging markets, and alternatives
• Learn how to avoid unwanted costs, liquidity issues and hidden complexities

ETF usage is climbing with assets growing by about 25 percent per year, and those who use them expect to expand their usage quickly. The Institutional ETF Toolbox provides the actionable information institutions need to identify and adopt the most suitable approach.

SECTION II
The ETF Toolbox

CHAPTER 6
U.S. Stock ETFs

Now that we have gotten a look at the ETF phenomenon and how to do due diligence, it is time to meet the ETFs. There are over 1,800 ETFs and close to another 1,400 in registration with the Securities and Exchange Commission (SEC), and they all have to be put into categories. This is part of what I do at Bloomberg.

Even though this book is about a toolbox, a good way to think about the ETF landscape is the metaphor of walking into a department store. When you enter, there are typically about 5 to 10 major departments, such as clothing, furniture, home appliances, toys, cosmetics, gardening, sporting goods, and hardware.

Within each department there are subsections and ultimately aisles. Then, when you eventually find the right shelf with the exact type of product you are looking for, there are many competing brands with products that range in style, quality, and cost.

This is exactly how ETFs are categorized. That is exactly how we built our ETF finder tool at Bloomberg. It’s just called asset classes instead of departments. Sectors, styles, regions, and market cap are the subsections and aisles, and the competing brands are iShares, Vanguard, SPDRs, and so on. With that metaphor intact, let’s have a look around.

Each section will examine some core categories and ETFs. These are the ones that you typically would give a sizable allocation to, as evidenced by their asset size. In addition, we will look at some satellite products as well. These are the more specific-purpose ETFs that you may not allocate a lot, too, but they could come in handy. They include sectors, single countries, smart beta, thematic, volatility, actively managed, currencies, currency-hedged, and interest rate–hedged ETFs, to name a few.

One thing to note is that the asset figures I use are all as of mid-2015, so they may have changed a bit as writing about ETFs is like trying to hit a moving target. But, their relativity to other categories and ETFs is what I’m trying to show and that won’t change that much and that is what is important.

In addition, I simply cannot cover every ETF (you wouldn’t want me too either). However, I will cover a lot of them and use several examples and case studies in each section that I think highlight a larger analytical point or show a popular dilemma that will give you an analytical edge when evaluating ETFs. There are patterns all over the ETF toolbox. And once you learn the patterns, it can help you in the analysis process. Enough babbling already; let’s just get started.

U.S. stock ETFs are the largest, oldest, and most popular category of ETFs. This is the area that people probably know the most about. U.S. stock ETFs have a whopping $930 billion in assets, which is 44 percent of the total pie. They have so much in assets because many of them are used as portfolio building blocks and get large allocations in portfolios. This category is dominated by big brand name issuers tracking big brand name indexes.

U.S. stock ETFs have gotten cheaper and more liquid over time. For example, the S&P 500 Trust (SPY) has an expense ratio of 0.094 percent today, down from the 0.20 percent charged in 1993 when it first launched. SPY’s gradually decreased fee is representative of the fee compression in this industry.

Let’s look at a couple of ETF examples in the large-cap, mid-cap, small-cap, micro-cap, and broad-market categories. We will also look briefly at ETFs tracking initial public offerings (IPOs), buybacks, spin-offs, and covered call strategies. You can basically capture every phase of a company’s life with ETFs.

Large Caps

U.S. large-cap ETFs have just over $600 billion of that $930 billion. The basic choice investors have to make is what index brand you like best and also if you want some kind of tilt, such as growth or value or dividends. Figure 6.1 shows the largest of the large-cap ETFs. Notice how three of the top four are all Standard & Poor’s (S&P) 500 trackers. U.S. large cap is the only category where you will see the top 10 ETFs each with assets well north of $10 billion and with such low fees. Life is good here. But, still, there are choices to be made for ETF investors.

Figure 6.1 Largest U.S. Large-Cap ETFs by Assets

Source: Bloomberg

S&P 500 ETFs

Incredibly, nearly half of the assets in the category, or $292 billion to be exact, are in ETFs tracking the S&P 500 Index. Since ETFs have existed, the most popular new launch is always an S&P 500 ETF. In the 1990s it was SPY, in the 2000s it was IVV, and in the 2010s so far it is VOO. It goes to show you that despite the explosion of newfangled products and innovation, many investors choose to keep it simple with ETFs.

However, choosing among the three may not be so simple. Even though they literally track the same index, a little due diligence will show you that they aren’t exactly equal. This is also a great example of how no two products are exactly the same.

The SPDR S&P 500 Trust (SPY) has many superlatives. It is the oldest ETF, launched in 1993. It is the largest ETF, at $180 billion. It also the most traded ETF in the world, with about $6 trillion worth of shares traded each year, which is more than Japan’s gross domestic product (GDP).

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Table of contents

• Cover
• Series
• Title page
• Copyright
• Epigraph
• Dedication
• Acknowledgments
• Introduction: Institutions and ETFs
• SECTION I THE ETF PHENOMENON
• SECTION II THE ETF TOOLBOX
• Conclusion: Five Takeaways
• About the Author
• Index
• EULA