An unlikely superstar is emerging in the battle for ETF supremacy: the professor.
Over the last six months, the $3.6 trillion U.S. exchange-traded fund industry has plucked several prominent academics out of the classroom and put them on the corporate payroll. OppenheimerFunds Inc. has appointed a brain trust to help generate and validate ideas for new products. Research Affiliates, a strategy and index creator, hired a Duke University scholar as a partner and senior advisor. And one college professor on the outskirts of Boston even started his own fund.
It’s easy to see why. With the three largest ETF issuers controlling 83 percent of the assets, others must go above and beyond to stand out. That means pioneering higher IQ products, like smart-beta, which shun traditional indexes in favor of weighting by other factors. It also means innovating wherever possible, setting an attractive price, coming up with a memorable ticker -- and now, getting backing from an array of big thinkers.
“Academics always bring credibility to the table,” said Rusty Vanneman, chief investment officer at CLS Investments, which manages $9 billion from Omaha, Nebraska. “They have always been important but probably even more so in recent years.”
Academic Rigor
Factors -- as the finance industry calls the dizzying array of theories about why the price of stocks or bonds moves -- are used to direct more than $700 billion, or 20 percent, of the U.S. ETF market, data compiled by Bloomberg show. They encompass themes like value, growth, momentum and quality. And many of these strategies were hothoused within universities, yielding research and publicity.
That academic rigor has proved popular with investors and issuers alike. While investors have been won over by the promise of better returns than plain-vanilla ETFs that are linked to a simple index, issuers can justify charging more for these products due to their additional complexity. The average management fee is 0.4 percent, versus as little as 0.03 percent for funds weighted by market capitalization.
But with so many funds to choose from, the divergent methodologies supporting them have come into question. One value fund may look at a stock’s price-to-earnings ratio, for example, but those earnings could be calculated on a forward, trailing or operating basis. Or, a fund could ignore earnings entirely and look at the ratio of price-to-sales, dividends or book value, says CLS’s Vanneman.
It’s not that one method is better or worse. But based on the precise formulas, the outcomes should differ.
“You have to decide that you know an aspect of financial markets in order to be able to pick between the various solutions because they are so nuanced,” said Sam Fraundorf, the Atlanta-based chief investment officer at Diversified Trust Co., which oversees $6.5 billion. “I’m not sure that all this proliferation is in any way, shape or form designed to enhance a true investment experience.”
Big Names