{"id":38565538,"date":"2021-07-11T06:30:33","date_gmt":"2021-07-11T06:30:33","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/2021\/07\/11\/the-united-states-of-etfs\/"},"modified":"2021-09-13T19:24:35","modified_gmt":"2021-09-13T13:54:35","slug":"the-united-states-of-etfs","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2021\/07\/11\/the-united-states-of-etfs\/","title":{"rendered":"The United States of ETFs"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">Just can&#8217;t get enough.<\/h2>\n\n\n\n<p>For the longest time in the US, actively managed mutual funds ruled the roost. Then came Jack Bogle with his index fund and the ceaseless mantra of \u201ccosts and taxes matter\u201d and the dynamic shifted, slowly at first and then suddenly, in favor of indexing. It was only a matter of time before people figured out the tax loophole of ETFs and now, there are over 2500 ETFs listed in the US.<\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p>Previously: <a href=\"https:\/\/stockviz.biz\/index.php\/2021\/06\/13\/etfs-for-asset-allocation\/\">ETFs for Asset Allocation<\/a><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"Would you say I have a Plethora?\" width=\"1020\" height=\"574\" src=\"https:\/\/www.youtube.com\/embed\/3AQ_eKVIqKE?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The Tax Loophole<\/h2>\n\n\n\n<p>Unlike in India, where mutual funds are \u201cpass through,\u201d US mutual fund investors pay capital gains tax on assets sold by their funds. When there are large-scale redemptions, say, during a market melt-down, funds are forced to sell their holdings. This generates capital gains taxes, meaning that investors have to pay tax on assets that had fallen sharply in value<a class=\"footnote-anchor\" id=\"footnote-anchor-1\" href=\"#footnote-1\">1<\/a>.<\/p>\n\n\n\n<p>ETFs\u200b, on the other hand, don&#8217;t have to subject their investors to such harsh tax treatment. ETF providers offer shares &#8220;in kind,&#8221; with authorized participants serving as a buffer between investors and the providers&#8217; trading-triggered tax events.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">A Plethora<\/h2>\n\n\n\n<p>Of the ETFs that survive today, the number of launches every year has trended higher.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/e744c09b-b8bb-4f73-97c8-b47a84926f01_4800x2400.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>While Equity ETFs dominate launches, the share of fixed income, alternatives, etc. has increased as well.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/6e80632f-4070-4bcb-9a7a-189a4da43130_4800x2400.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>Most of the AUM resides in \u201cvanilla\u201d strategies &#8211; typically market-cap based.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/0c4cafe1-3b8d-435e-8dbe-b009845ff6a1_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The winner HAS taken all<\/h2>\n\n\n\n<p>Plot the assets of each ETF, in billions, in log-scale and you can tell that this is a game of scale.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/2dc1418d-e6d4-4468-9346-3cc884f638b0_4800x2400.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>Of the total 2577 ETFs, 2022 (78.5%) have less than a billion dollars in assets. You need to filter for $10 billion and up to just see the x-axis.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/5d6a5eb0-9f36-4e18-a49f-7924a335558d_4800x2400.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>The top 3 issuers: Blackrock, Vanguard and SSGA manage ~80% of <em><strong>all<\/strong><\/em> ETF assets.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/33f1f7db-9c02-4ca5-8928-5c9ec545d46b_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Where there is an ETF, there\u2019s an Index<\/h2>\n\n\n\n<p>Until last year, ETFs were supposed to be a \u201cpassive\u201d entity. There were no \u201cactively managed\u201d ETFs. In order to be passive, an ETF needed to follow an index. And indices had to be rules based &#8211; however convoluted the rules. And issuers needed a third-party to provide the index. <\/p>\n\n\n\n<p>The rise of ETFs (and passive investing, in general) put index providers in the middle of all the a action. They became a crucial cog in world finance that can make or break entire economies. So powerful, in fact, that China blackmailed MSCI to include its domestic stocks in its Emerging Markets Index, which is tracked by close to $2 trillion in assets<a class=\"footnote-anchor\" id=\"footnote-anchor-2\" href=\"#footnote-2\">2<\/a>. And India has been working on inclusion of Indian sovereign bonds in global bond indices<a class=\"footnote-anchor\" id=\"footnote-anchor-3\" href=\"#footnote-3\">3<\/a>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/ea7e6387-2759-49f1-82ae-941c8b54d2a6_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>We can see industry consolidation here as well. The top 5 index providers control ~75% of ETF AUM (more if you include index funds.) S&amp;P Global and MSCI are as close to \u201cpure-play\u201d index providers as you can get and their stock market performance is off-the-charts.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/afde8255-8b2f-48ab-b5ed-ca335ab53763_1400x800.png\" alt=\"\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Fee Squeeze and Innovation<\/h2>\n\n\n\n<p>The problem with index ETFs\/funds is that buyers only care about two things: expense ratio and tracking error. This resulted in a massive fee war that saw the vanilla-passive industry consolidate around Blackrock and Vanguard. For example, Vanguard\u2019s S&amp;P 500 ETF\u2019s expense ratio is 3bps. <\/p>\n\n\n\n<p>So, what next? <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">International ETFs<\/h3>\n\n\n\n<p>The first wave was ETFs providing international diversification. However, the \u201chome-bias\u201d is pretty strong with AUM under international ETFs barely making a quarter of the total.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/7062a06e-5247-4aea-8b6e-76bc507c1488_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>On a weighted average basis, these ETFs charge about 30bps. However, since these are mostly cap-weighted, the fee-war is just as intense here.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Leveraged\/Inverse ETFs<\/h3>\n\n\n\n<p>Many investors have mandates that prevent them from trading derivates outright. This is especially true for Indian investors taking the LRS route to invest in the US. However, Wall Street has your back.<\/p>\n\n\n\n<p>Leveraged ETFs give you 2x or 3x the daily returns of a benchmark index like the S&amp;P 500 or the Nasdaq 100. Feeling bearish? Inverse ETFs do the opposite.<\/p>\n\n\n\n<p><strong>Caveat<\/strong>: <em>These are <strong>NOT<\/strong> buy-and-hold investments and are more suitable for day-traders. The discussion requires a separate post.<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/3b790dc6-ff96-4532-967b-2e08f6bb5f16_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>On a weighted average basis, these ETFs charge about 100bps. While lucrative, they are mostly niche.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Active ETFs<\/h3>\n\n\n\n<p>An ETF\u2019s tax-free wrapper make it an order of magnitude more attractive than an identical mutual fund. New issuers\/managers have taken advantage of this and launched actively managed ETFs. <\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com\/public\/images\/dd01853d-37a4-47fa-93f4-24faf0cc8bfa_9600x4800.png\" alt=\"\"\/><\/figure>\n\n\n\n<p>On a weighted average basis, active ETFs charge about 50bps. These are still early days for this category &#8211; they barely make 5% of total ETF assets. Liquidity and tracking errors during market crisis are yet to be tested.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p>There is a plethora of choices when it comes to ETFs in the US. If you plan to wander away from the plain-vanilla stuff, please take the time to read the prospectus and understand how it works. <\/p>\n\n\n\n<p>If you are looking for simple, pre-canned investment strategies to invest in the US, check out <a href=\"https:\/\/freefloat.us\/\">freefloat.us<\/a><\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"US ETFs - a high level overview\" width=\"1020\" height=\"574\" src=\"https:\/\/www.youtube.com\/embed\/F0LrU-wIgw4?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n<div class=\"footnote\" id=\"footnote-1\"><a href=\"#footnote-anchor-1\" class=\"footnote-number\" contenteditable=\"false\">1<\/a><p><\/p>\n<div class=\"footnote-content\">\n<p><a href=\"https:\/\/www.investopedia.com\/news\/etf-open-secret-theyre-tax-loophole\/\">ETFs &#8220;Open Secret&#8221;: They&#8217;re a Tax Loophole<\/a><\/p>\n<\/div>\n<\/div>\n<div class=\"footnote\" id=\"footnote-2\"><a href=\"#footnote-anchor-2\" class=\"footnote-number\" contenteditable=\"false\">2<\/a><p><\/p>\n<div class=\"footnote-content\">\n<p><a href=\"https:\/\/www.wsj.com\/articles\/how-china-pressured-msci-to-add-its-market-to-major-benchmark-11549195201\">How China Pressured MSCI to Add Its Market to Major Benchmark<\/a><\/p>\n<\/div>\n<\/div>\n<div class=\"footnote\" id=\"footnote-3\"><a href=\"#footnote-anchor-3\" class=\"footnote-number\" contenteditable=\"false\">3<\/a><p><\/p>\n<div class=\"footnote-content\">\n<p><a href=\"https:\/\/economictimes.indiatimes.com\/markets\/bonds\/efforts-on-to-include-indian-govt-bonds-in-global-indices-from-next-year-dea-secretary\/articleshow\/79801209.cms?from=mdr\">ET<\/a>, <a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2021-03-30\/ftse-puts-india-saudi-bonds-on-watchlist-for-possible-inclusion\">Bloomberg<\/a><\/p>\n<\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Just can&#8217;t get enough. For the longest time in the US, actively managed mutual funds ruled the roost. Then came Jack Bogle with his index fund and the ceaseless mantra of \u201ccosts and taxes matter\u201d and the dynamic shifted, slowly at first and then suddenly, in favor of indexing. It was only a matter of &hellip; <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[31],"class_list":["post-38565538","post","type-post","status-publish","format-standard","hentry","category-investing-insight","tag-etf","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/38565538","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=38565538"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/38565538\/revisions"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=38565538"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=38565538"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=38565538"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}