Examining the Impact of ETFs on Investment Strategy

At the ETF & Indexing Investments USA 2011 Conference in New York City this week, panelists discussed the pros and cons of the “democratization” of exchange-traded funds (ETFs).  

Speaking on the panel were Joe Gawronski, President and Chief Operating Officer of Rosenblatt Securities; Mark Scheffler, Founder of the Appleton Group; Simon Lack, Founder of SL Advisors; and Eric Pollackov, Managing Director, ETF Capital Markets at Schwab ETFs. Moderating the panel was Eric Balchunas, ETF Specialist at Bloomberg.

When asked about the impact ETFs have had on the marketplace, Gawronski said, “You have to look at the way these things trade; they’re very different from equities. The ‘Flash Crash’ report showed ETFs had more trouble that day than equities…we have to attack this market differently.” He added that he’s not a big believer in the over-arching arguments that all ETFs are good or bad; instead, he says it’s important to focus on how they differ from other investment vehicles and to adjust your strategies appropriately.

Pollackov followed up by saying how the industry has “democratized” a lot of the asset classes for ETFs, “but we need to provide education on them, so every-day investors know what they have access to,” he said. He pointed out that it will take time, in a “trickle-down” pattern, for the whole investor community to use ETFs appropriately.  “The educational process is imperative,” he said, and that the “manufacturers” of ETFs are not taking on enough educational initiatives.   

Hailing from Wisconsin, Scheffler elaborated on the responsibilities of the ETF “manufacturers,” but preferred to use an agricultural metaphor. “When we ‘plant’ a portfolio, we want to know what we’re planting. Know what you own is a great mantra, and the way ETFs are structured allows for that naturally,” he said.   

At which point, the moderator asked the panelists to discuss transparency issues surrounding ETFs, specifically how some are considered to be “less transparent” than others.

Pollackov argued that there is no such thing as a “less transparent” ETF. “It’s simple – just go to the Web site of the manufacturer. They have to show what’s inside that fund on a given day. You can call them to ask,” he said. “It’s a major breakthrough as compared to a mutual fund, which shows [the fund parts] quarterly. ETFs have to show everything.”