a brief history of etfs: from tips to levered inverse replication barry gordon president and...
TRANSCRIPT
A Brief History of ETFs: From TIPS to Levered Inverse Replication
Barry Gordon
President and CEO September 10, 2014
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Agenda
1. Evolution of the ETF Market
2. Intellectual Underpinnings
3. Fixed Income
4. Recent Developments
5. Where to From Here?
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Evolution of the ETF Marketplace
Current State of the ETF Market
ETFs are available that track investments in all liquid asset classes – equities, fixed income, commodities and currencies.
TIPs very first ETF
Variations to achieve either long or short exposure to the underlying, including on a levered basis.
Active and Passive variants
Structural advantages to users− Price Maker vs. Price Taker− Bulk order capabilities
Size of Market− Total Global Capitalization of over $2.25 Trillion as at December 31, 2013− Canadian ETF Market of over $63 billion− Total Value Traded of over $15.7 Trillion in 2013
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The Global ETF Industry
Growth of ETFs Globally (AUM in millions)
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The Canadian ETF Industry
Growth of ETFs in Canada (AUM in millions)
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Perspective – Relative Size of Markets
Global equity market = $53T
EquityMutual Funds
Global fixed income market = $100T
Fixed IncomeMutual Funds
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Intellectual Underpinnings
Equity ETF Evolution mirrors MPT Debate Beta = Broad capitalization weighted indexation Product extension into Sectors, Sub-Sector, Industry Macro Consistent Low cost
Persistent Flaws in CAPM – Challenge to Orthodoxy Existence of Value, Momentum, Size anomalous returns Different Weighting Methodologies
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Fixed Income
Evolved Similarly to Equity Broad Benchmark Developed Market Indices weighted on basis of face value Expanded beyond Investment Grade Credit Strategy ETFs
− Ladder
− Bullet
− Barbell
Challenges Emerge Opaque Markets
− OTC Markets anathema to a structure that thrives on transparency
Illiquid Assets?− Bank Loans
− Viatical Settlements
Hedging Proxies
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Recent Developments
Derivatives - Tools to Facilitate/Enhance Replication Synthetic exposure Derivative Overlays Leveraged and Short Exposure
Boon or Bane? Will ETF’s suffer from Over-Engineering? In rapid growth markets like ETFs, we often observe the “build it and they will
come” phenomenon. There have been and will continue to be ETFs which never reach their desired
potential
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Where to From Here?
Evolving demand from retail, advisors and institutions Tools versus solutions
Active Versus Passive Can Active add Alpha when costs are neutral?