ETF Conference--Day Two

Some observations and comments made in presentations and other tidbits.

Part of the kickoff this morning included a quote from Susan Thompson from Blackrock and who is serving as Chairperson of the event. She said 2010 was the best of times because the industry's AUM grew to over $1 trillion and it was the worst of times because of the flash crash.

IndexUniverse gave a presentation about a new product/service that takes data sorting, and analytics to a whole new level. Part will be free and part will cost money (as I understand it). In the opening of this session Matt Hougan said that "evaluating ETFs is hard." While the information they will provide is going to be unique (trust me on this) and useful, investors will still have to do the work of looking at the holdings (the new IU service will help with finding the info) and make some sort of informed, qualitative decision. An example I used in a conversation with someone was if there was a REIT ETF with 20% in Prologis (PLD) and one with 6% in Prologis, would he take the time to learn a little about the name and have that influence his decision.

Dan Waldron from First Trust made an interesting comment in a session called ETFs, Mutual Funds or Both? He said it is not a choice between ETFs and mutual funds but instead is a choice between beta or alpha with idea being that index replication would mean ETFs but attempting to add alpha would mean mutual funds. His firm has rules based, quasi-active ETFs that are bridge between the two. I would add that beta (so ETFs) can be used to generate alpha. Interestingly there was no mention of individual stocks in this session.

Nasdaq OMX has a list of what it calls Alpha Indexes that seeks to capture the spread between an individual stock and the S&P 500. If Google goes up 25% and the SPX goes up 10% then this index would go up 15%. There is also one that compares TLT to SPY and another that compares EEM to SPY. The hedging implications here are very interesting conceptually with a couple of tweaks. That these exist shows that the industry is spending a lot of time on innovation--more time than we may realize compared to the amount of new product that comes out.

On a related note Dow Jones has a bunch of fixed income indexes for Chile, Brazil, Mexico and even a couple for Peru. I of course would be most interested in Chile but I have come to learn that there are many obstacles in making this type of index into an investable product, so much so that it may not happen with smaller destinations like Chile.

On yet another related note I went to dinner with a bunch of the gang from WisdomTree along with a couple of other guests. Part of the conversation included some serious questions directed at me about various things they are considering offering. As this was in the idea stage for them, they were talking to me as an RIA not a blogger so it would not be cool to give details but the depth of the questions revealed that they are exploring all sorts of things and want end user input. This is similar to conversations I've had here with some other people in similar positions with other firms. This is encouraging to know this attitude exists and while the obstacles in the way of some interesting concepts may never be overcome the firms are trying to innovate and create new access.

One question I've asked several other presenters and sponsors here is what their perception is of the advisor community's understanding of the product in terms of how to analyze and implement. I've gotten a wide range of answers some encouraging and some discouraging but there is a consensus that there lot more educating still to be done.

Flying home today.