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Morningstar ETF Invest Live Blog, Day 1: Applied Strategies, Schwab’s Sonders

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5:30 PM, CDT, Oct. 3, 2012

LizAnn Sonders of Schwab’s parting shot at Morningstar ETF Invest Conference. Don’t worry about the effects on the economy and the markets of  boomers liquidating their equity portfolios as they age. Sonders: “They already did that in massive amounts in 2008.”


5:20 PM, CDT, Oct. 3, 2012

Two reminders from LizAnn Sonders on market moves and the economy:

  • Stocks lead the economy—the market anticipates (doesn’t react to) current economic climate
  • Diversification remains key in volatile macro times; cycle still likely favors combination of asset classes

5:05 PM, CDT, Oct. 3, 2012

Two “bright spots” in economy, says LizAnn Sonders, chief market strategist for Charles Schwab & Co., at the Morningstar ETF Invest conference:

1) Manufacturing making a comeback, at least in relative terms

2) Housing another bright spot—as shown by the “real” mortgage rate—the nominal mortgage rate minus inflation/deflation in home prices. Right now we have very low mortgage rates and increasing value of home prices.

4:50 PM, CDT, Oct. 3, 2012

LizAnn Sonders on
Unlikely while the velocity of money remains depressed, since lending remains subdued, (while bank deposits are soaring thanks to Fed.)

U.S. Debt Crisis
GDPs’ strength waned as debt growth surged—hitting  the Reinhart, Rogoff threshold or reaching the 90% debt/GDP; US Federal debt now at 102% of GDP

Fiscal Cliff
May well be avoided—”most likely a can kick; so we won’t know for sure until sometime in 2013.”

4:45 PM, CDT, Oct. 3, 2012

LizAnn Sonders of Schwab says she worries about the “pervasive sense of pessimism,” about the markets and economy, but argues there are reasons for optimism. They include: “incredibly strong corporate earnings, a ton of cash at corporations, with some green shoots, especially in housing, and increased competitiveness,” particularly regarding China.

4:35 PM, CDT, Oct. 3, 2012

Scott Burns of Morningstar formally opened the third annual Morningstar ETF Invest Conference in Chicago on Wednesday afternoon, recalling how little had changed since last year’s meeting—the troubles with Europe, political gridlock in Washington. ‘I don’t want to be too negative, but we’re all feeling it,” noting that “we’ll probably be talking more about China’s slowing economy” in the future.

“Folks in this room are at the leading edges of the changes in money management,” he says, “especially in a low-return environment, “cost matters even more,” we’re learning, just as we learned that “diversification and asset allocation mattered, as we learned in 2008.”

:This has always been an active management conference.”

Next up: LizAnn Sonders of Schwab.

4:20 PM, CDT, Oct. 3, 2012

Joyce Hanson reports:

Just arrived in Chicago and for the first time met Don Phillips — Morningstar’s grand poobah, a.k.a. president of Morningstar’s Investment Research division. It’s Morningstar’s third annual ETF event, and Phillips sounds pretty excited about a new trend he’s seeing in the advisor world.

“This conference attracts a much different kind of advisor,” Phillips says. “They view themselves more as portfolio managers than traditional advisors who focus on being relationship managers.”

With the ETF toolkit growing all the time, with new platforms and products, advisors now have access to portfolio management data to which only the most elite institutions and hedge fund managers had access, according to Phillips.

“The new type of advisor is selling strategies to other advisors,” says Phillips.

3:25 PM, CDT, Oct. 3, 2012

Momentum strategies can be more easily and cheaply done using ETFs, according to Morningstar’s Samuel Lee, speaking in the preconference session of the 2012 Morningstar ETF Invest Conference in Chicago. To truly take advantage of the market, investors need to be either a very quick momentum trader, he says,  or a very patient value investor—but most investors are neither.

But using his current valuation of the markets, Lee provided his estimates on long-term returns of those markets:

U.S. Equities: 3.6%  Intl. Equities: 5.2%  EM Equities: 6.0%  10Yr Treasuries: -0.8%  Investment Grade Bonds: 0.4%  High Yield: 1.5%             3-Month T-Bill: -2.3%

Lee suggested the following ETFs for advisors interested in inveting in attractive non-U.S. countries:


Regional Exposure: VGKHEDJ

Broad Intl: VWOVEA

One final piece of advice from Lee: If you’re looking for either diversification or returns, don’t invest in private equity; PE only gets the returns of the stock market, he argues, but with much higher risk.

3:10 PM, CST, Oct. 3, 2012

All good investors have a good sense of history, argues Samuel Lee to the growing crowd of mostly advisors in the Applied ETF Investing Strategies preconference meeting at Morningstar’s ETF Invest Conference at the Radisson Blu hotel on Chicago’s Near North neighborhood.

Debunking one particularly popular piece of historical data, Lee, the editor of Morningstar’s ETFInvestor, cited the Dimson-Marsh-Staunton Global Returns Data study to show that real equity returns in the U.S. over the period 1900—2010 showed a 6.2% return for equities and 1.93% in bonds. European equity returns were lower than that, and European bond returns were lower than U.S. cash returns during that period.

That conflicts with the common pronouncement that U.S. equities have returned 10% annually since 1926, but pushing the starting date back to 1900 puts the kibosh on that number.

Lee’s warning to those advisors and investors who don’t take the long view: asset classes exhibit decade-long (secular) cycles, and it is dangerous to extrapolate patterns from only a few decades of data. Do not ignore history. There are timeless principles at work.

Oh, one other bit of historical news from Mr. Lee: in looking at those returns: dividends have everywhere been the biggest source of equity returns from 1900-2010—but yield has not grown quickly. Moreover, per share dividend growth is modest but negatively correlated with GDP growth, he says.

3:00 PM, CST, Oct. 3, 2012

Strauts finishes his portion of the “Appliied ETF Investing Strategy” session at Morningstar ETF Invest Conference by offering two of Morningstar’s picks among emerging-market bond ETFs.:

1ETF Picks in Emerging Market Bonds—both with 5% yields and now investment grade

1) WisdomTree Emerging Market Local Debt (ELD), which owns what he called a “diversified basket of local currency sovereign debt,” along with an active investing strategy “tilted to countries pursuing monetary and fiscal discipline” and tilted away from countries that are living beyond their means.

2) PowerShares EM Sovereign Debt (PCY), which he says owns a diversified basket of U.S.-dollar-denominated sovereign debt, which Strauts said is “ideal for investors bullish on the dollar or looking for lower volatility exposure” and is equal weighted by country.

2:05 PM, CST, Oct. 3, 2012

On the subject of high-yield bonds, Strauts recommends HYS, PIMCO’s 0-5 Year High Yield Corporate Bond ETF. Its benefits?

  • Lower interest rate risk than longer-duration competitiors
  • Higher returns when compared to the BofAML U.S. High Yield Master II index
  • It holds bond to maturity, reducing transaction costs

2:00 PM, CST, Oct. 3, 2012

Strauts warns attendees that in portfolio construction, everyone worries about the risk of rising rates, but he reminds us that current interest rates can go lower.

Exhibit No. 1: Japan—the Japanese experience is an example of how low rates can go; 10-year Treasuries are yielding 1.67; Japan 10-years are at 0.67;

Most investors are putting $2 into fixed income for every $1 in equities because they’re looking for safety, he says, but Strauts says if he were buying fixed income “I would want to be more in corporates, munis and emerging markets bonds.”


1:45 PM, CST, Oct. 3, 2012

There are about 100 attendees listening to the presentation by Strauts, who assumes a certain level of sophistication of the audience sitting in the Radisson Aqua Blu hotel in Chicago.

–UPDATE: During a break after his portion of the presentation, Morningstar’s Strauts estimates that close to 90% of the attendees at the ETF Invest conference are financial advisors, along with the odd individual investor and institution.–

Focusing on ETF liquidity, Strauts reminds the audience, including presumably many advisors, that liquidity increases as an ETF gains more assets, and is helped along by the liquidity of the underlying securities in the ETF, along with greater daily trading volume of the ETF due to more efficient trading execution.

1:20 PM, CST, Oct. 3, 2012

Responding to a question on taxes, Strauts points out that many ETFs have never issued any capital gains, and those that do are very minimal.

Responding to yesterday’s news on Vanguard shifting indexes for 22 of its ETFs, Strauts says Vanguard us the low-cost ETF provider, but since Vanguard doesn’t run the indexes itself, it has to pay a fee to MSCI “in the hundreds of millions of dollars,” so has made an agreement with FTSE and CRSP to base those ETFs on their indexes rather than MSCI’s.

As for Vanguard’s VMO, the largest emerging market ETF, when changing the index, the underlying allocation of the fund will change, Strauts says. He notes that South Korea is now 12% of the MSCI EM index, but South Korea is considered a developed market in the new indexes, so in theory there could be a capital gains distribution for VMO holders. However, Strauts said that since Vanguard is the first ETF provider to make this change, it’s actually better for investors to make it earlier rather than later.


1:10 PM, CST, Oct. 3, 2012
Morningstar’s Timothy Strauts began by reciting some of the well-known benefits of the 1,486 existing ETFs:

Lquidity and availability, if you have a brokerage account, you can trade any ETF, and they give you the ability for precise portfolio management;

Costs are lower, because you don’t have the overhead that mutual funds have, and those saving are often passed along to shareholders;

Taxes, because of ETFs’ in-kind creation and redemption process avoids taxable events;- there’s also low turnover of index funds;

On costs, Strauts notes that if an investor is using core ETFs, your expenses probably average around 20 bps—the average for all is closer to 55 bps because of those leveraged and inverse ETFs which have higher expenses.

1:00 PM, CST, Oct. 3, 2012

Day one of the third annual Morningstar ETF Invest Conference kicks off at 1:00 PM CST with Morningstar’s Paul Justice leading a panel that addresses “Applied ETF Investing Strategies.”

Justice, director of passive fund research, North America, is leading one of the three preconference sessions, with Morningstar’s Timothy Strauts, a fund analyst and team leader (and a former advisor), and the new editor of Morningstar ETF Investor, Sam Lee.

First up, why use ETFs rather than open-end or closed-end mutual funds?