I like surprises! Maybe I am but a few. However, surprises are about change and opportunity. Some surprises are also about innovation and disruption, so arguably my stance is consistent with my views on how “structure matters.” Two surprises I find exciting to highlight are:
- AUM leadership in Actively Managed ETF AUMs
- Julian Emanuel of Evercore ISI, says the S&P 500 may jump 22% (S&P 500 Price Target: 4,800) because there is no recession in sight
Who is Surprised by the Leadership in Actively Managed AUM?
Surprise #1 – taking the road less traveled has resulted in some big ETF launches from Dimensional Funds, but the decision to convert to ETFs was an inevitable upgrade for investors from a tax standpoint. Of course, this does not take away from the hard truth that growing an ETF remains a grind – especially as an actively managed fund. This is perhaps evident by the fact that a 3 year track record typically takes 3 years to form and because ETF investors are empowered to scrutinize the decisions made by portfolio managers. This is probably the reason why most equity products remain small, but in many instances this can be overcome based upon similar types of experience and consistency of process. Surprise #2 – for example, we recently hosted the portfolio manager, Sanjay Devgan from the $17.8 billion Columbia Seligman Semiconductor & Technology ETF (SEMI) on one of our Twitter Spaces shows. What a win for both investors and the audience who joined! With an open microphone, everyone on Twitter could tap this portfolio manager’s 27 years of experience by asking questions and learning how decisions are made for the firm’s funds. What a great example of ETFs democratizing investing.
One thing that is not a surprise is that short duration fixed income funds are leading the charge in actively managed funds. PIMCO led the charge when the firm launched the Enhanced Short Maturity Active ETF (MINT). Its flagship ETF, BOND, was the first actively managed ETF. However, the SPDR Blackstone Senior Loan ETF (SRLN) by SSGA has been quietly building momentum. This is an asset class that certainly needs active management to avoid surprises. See a discussion with Portfolio Managers, Gordan McKemie and Mariann Montagne – its growth in AUM just makes sense.
The Surprise Case for a Bull Run
There is so much negative news painting the tape that the bears are in control for now. Any bull runs will be viewed as bear market rallies. The fact is that anyone with a bullish stance almost seems “irrational.” Yet, the surprise could be that things are not as bad as the bears and headlines make them seem. Could a recession not be in the cards? Could inflation be close to peaking? Could the war in Ukraine end? Could so many negative headlines be already built into investor expectations? Truth is, no one knows, yet so many claim to have the facts. Thinking long term is the only answer.
Regardless of one’s views of the markets, we appreciated Julian Emanuel’s lone wolf statements about the upside of the market. The prospects of 4,800 on the S&P 500 is a welcome surprise! Granted, while he recognizes that the current environment is “ugly,” his optimism is predicated on healthy credit markets, good earnings, growth and positive employment data bringing confidence to the market. Of course, much of this would be a surprise to the bear camp! Metrics to focus on include the 10-year Treasury Note yield cooling and ending the year at 3%. Emanuel is most bullish on health care and sees solid upside for long-term investors. He’s also overweight in financials and industrials. In the ETF Think, we inspire and share a great deal of debate and constructive dialogue on Twitter Spaces, 1-on-1 due diligence calls and our Portfolio Manager Think Tank Exchange Interview Series. If you are a “know it all,” most of this won’t be of interest to you. Certainly, though, experienced market participants know that investing is about being humble, and dynamically assessing your portfolio positioning. Surprises are a normal course for investing, and investors must now contend with more volatility. Blackswan – we are waiting for you. Who knows? Surprise… or just wishful thinking. Could we have a “melt-up” as everyone is expecting a “melt-down?”
Summary
Today’s market surprises are about opportunity, but so many people are not thinking long-term because we are in a “risk-off” environment. This probably means that few people care to admit that despite a negative carry, cash as an asset class is building. For ETF issuers this means that money is in motion. For investors this means flexibility, risk mitigation and potentially a loss of income or capital appreciation. Back in July 2020, the ETF Think Tank released a piece that proposed metrics to measure ETF innovation to highlight the positive momentum of innovation we envisioned building in the ETF market place. The piece is rather detailed and someday needs to be updated. The simplest evidence that the thesis was correct comes from the fact that today, over 11.22% of the $11.69 Billion ETF ER 12 Month Revenues comes from Actively Managed funds. This number should surprise many people. We would expect this number to continue to increase as a result of mutual fund complexes continued embracement of the ETF wrapper. Stay tuned!
Disclosure
All investments involve risk, including possible loss of principal.
This material is provided for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).
