ETFs: Business Could Not Be Better

At the InsideETFs conference in Hollywood, FL, author Michael Lewis outdrew the many luminaries on hand offering investment advice. From Liar’s Poker to The Fifth Risk, Lewis has honed his ability to identify a story and recount it engagingly. Interviewer Barry Ritholtz provided thoughtful questions that allowed his guest to enlighten and entertain.

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The book you write isn’t what people read. Liar’s Poker was intended to turn young graduates away from Wall Street. After all, Lewis abandoned a sharply rising $250K annual income for a $40K book contract, only to receive over 100 letters seeking career advice in banking.

Two of Lewis’s books have been made into movies. Tom Wolfe offered memorable advice — when Hollywood, CA offers a movie deal, drive fast to LA; hurl the script over the wall; grab the cash they toss back, and drive very fast east. Bonfire of the Vanities, Wolfe’s novel which caught the 1980s Wall Street zeitgeist only preceded Lewis by a few years. It might be the worst movie ever made, deeply disappointing to Wolfe’s readers and no doubt the author himself. Lewis invests his personal assets in index ETFs which drew a hearty round of applause.

On the more prosaic topic of ETFs, business continues to grow strongly. NYSE executive Doug Yones reported that ETFs have reached 40% of exchange volume. Christmas Eve, normally one of the quietest days, was a record as stocks plunged before January’s rebound. Yones is relieved that this happened without NYSE making headlines. Many have predicted volatility would expose flaws in the structure of ETFs. Criticism is diminishing, as the market keeps working. Pressing the advantage of momentum, Yones expects ETF volumes to double.

Fixed income is a big source of growth. The yield curve offers around 2.5% at every maturity. One dimensional but finally a return of sorts, there are many opportunities to restructure indices that afford quite precise portfolio construction.

ETFs are now offered that mimic structured notes, with capped upside and limited downside. Doug Yones expects actively managed ETFs that don’t provide daily position transparency to be available soon, bringing in some new proprietary strategies.

Bitcoin, last year’s fad, has been replaced by marijuana ETFs. No matter that farming relies on extensive government support, weed believers note huge paper profits for early investors. No more articulate response is required.

As in the past, we derived most value from scheduled and impromptu meetings. S&P is our partner for our ETF,  so Michael Mell kindly endured a photo with your investment management team.

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The ETF business has never looked so strong.