ETF slop

On the investing front there is an absolute explosion of new ETFs being listed every month.

Dave Nadig gave a presentation for Kitces.com and summarized the key points in:

The ETF Market: A Zine (14 min read)

A few notable takeaways:

• ETFs have become a behemoth of $10 Trillion in assets across some 4,000 products.
• That growth has come largely at the expense of traditional active equity mutual funds, although the worst of that outflow seems to have abated a little. As every asset manager on the planet finds a way into the ETF market, the “horse race” between mutual funds and ETFs matters less and less.
• Traditional Mutual Funds will exist forever thanks to 401ks, or until someone rewrites the entire US retirement system.
• The industry is on a massive product development binge, launching 650 ETFs this year so far with an open/close ratio of 3:1.
• Over 40% of industry revenue comes from products that aren’t cheap beta.
• There are more ETF Brands now then there were ETF Tickers 20 years ago

The post is directed at financial advisors but hands-on individual investors should certainly read it.

And if you’re interested, there is even a “how to launch your own ETF” discussion including a link to Corey Hoffstein’s tutorial.

One of the comments describes the post well:

A wonderfully-written, comprehensive, and refreshing time piece about the real story of ETFs for all – pro’s or not!

All this financial, umm, innovation does get a little chuckle from me (levered exposure to individual stocks? Really? It’s like ghost of single stock futures haunting your watchlist).

The chuckle:

I’m not the only wiseguy feeling this way. This wiserobot is less lazy than me in its skepticism:

The thread continues…

Shorting all this nonsense (uncle nonsense reporting for duty) vs going long whatever it’s trying to replicate directly is a labor-intensive way to effectively pay yourself the embedded management fees. But the feasibility is predictably undermined by borrow costs.

But as a trader, it’s a useful reflex to:

1. Observe the growth of “product” incentivized by fees and lowered barriers to entry
2. Expect a bunch of trash to be launched with the logic of “it’s a call option on asset gathering”

It can inspire trade ideas from a place of maximal interpretability — you can’t launch all this stuff and expect none of it to be steaming hot turds.

Dave even warns you about what’s coming to the crap carousel:

I have been asked about getting private equity and credit into ETFs every single week this year so far. I’ll just put the marker down here again: this is a bad idea. YES, it is the case that we have broken market capitalism so badly that the majority of what we would recognize as actual capital allocation and risk taking happens privately. NO, that is not a good thing, and it does not mean we should shove all that private capital into daily-liquidity structures like ETFs.

The money currently trapped in private markets is desperate for liquidity so it can invest back into greener deals where there’s more profit runway. That money will push, and push, and push until it finds a new pile of money to sell to. Don’t fall for it. Be super skeptical.