Morningstar ETF Invest Live Blog, Day 2: Morgan Stanley vs. iShares on the Future of Advisors

4) Taxable Bond: iShares

5) U.S. Stock Vanguard

More to come on SPY versus VTI—with a few surprises. Watch this live blog!

11:05 AM, CDT, Oct. 4, Joyce Hanson here:

Big News here at Morningstar ETF Invest: Morningstar is launching awards for best U.S. ETFs and ETF providers. No suprise: biggest winners are iShares and Vanguard.

10:10 AM, CDT, Oct. 4, James J. Green:

There are four main functions of using alternatives in portfolios, according to Joanne Hill of ProShares:

1. Improve return-risk profile/diversification: For example, through hedge fund replication, managed futures, equity long/short.
2. Manage equity risk: For example, through inverse equity; VIX fugtures 
3. Manage Interest rate/inflation risk: Through TIPS, inverse fixed income; currencies, commodities, real estate 
4. Manage exposure to asset classes: geared ETFs, sector’/industry; country equity/debt

10:05AM, CDT, Oct. 4, James J. Green:

Joanne Hill says ProShares VIX ETFs have attracted $1 billion in assets so far:

UVXY

VIXM

SVXY

 10:00AM, CDT, Oct. 4, James J. Green:

Dr. Joanne Hill, head of investment strategy at ProShare Advisors, begins her speech on ETF alternatives tool kit by noting how well the S&P 500 has performed this year, but calling it “the least romanticized equity rally ever.”

Discussing the relatively slow rate of alternatives adoption in clients’ portfolios, she said that it was in the 1970s that endowments started to look at alternatives and many pension funds began to do so after 2000-2002, as “bonds tumbled.” After all that time, both groups are only now “getting into double digit allocations” to alternatives.

“So we’re in a similar situation today with our clients,” Hill says, but also “we’ve learned a lot within the past 10 years about liquidity,” so the alternative solutions for individual clients will share many commonalities with institutions, but also be different.

Since, she says, market volatility has spiked, just as we build houses to withstand storm, “we have to build portfolios to survive these (volatile) times in the markets.”

9:35 AM, CDT, Oct. 4, James J. Green:

Morningstar says 430 attendees this year for its ETF Invest conference at the Radisson Blu hotel in Chicago; up from about 400 last year

9:15 AM, CDT, Oct. 4, James J. Green:

Looking at the economy and markets in 2013 and beyond, BlackRock’s Russ Koesterich says at the 2012 Morningstar ETF Invest Conference:

Chances of:

“Great Idle” (slow growth) in developed markets:  65% probability Global recession: 30% probability Accelerated growth: 5% probability

So under such a scenario, BlackRock is recommending investors “get defensive, casting a wider net,” including:

1. Mega-cap, dividend-paying stocks
2. Smaller developed markets, specifically the “CASSH” countries—Canada, Australia, Switzerland, Singapore and Hong Kong 
3. In bonds, favor investment grade and municipals 
4. Maintain strategic allocation to commodities, including gold.

9:05 AM, CDT, Oct. 4, James J. Green:

Fiscal cliff and recession? Koesterich says no one on the sell side believes economy will contract in Q1, despite looming fiscal cliff. Most investors expect last-minute compromise, which he says is not unreasonable, but he says BlackRock has been speaking to “people in Washington” who suggest there’s a better than 50-50 chance we’ll go off the fiscal cliff at least for a short time. After all, he says, with our experience of the past few years, “why would politicians get things fixed between Nov. 7 and New Year’s Eve.?”

The most likely election outcome: Obama wins in a tight race, GOP holds onto the House, and there’s near-equilibrium in the Senate. But even there, it’s likely there will be more polarization, esp. with retirement of some moderate Senators like Lieberman, Snowe, Nelson.

8:55 AM, CDT, Oct. 4, James J. Green:

On demographics, Russ Koesterich of BlackRock says one troubling trend is the number of people dropping out of the workforce—the participation rate—which also puts strain on entitlements. He points out that the average age of retirement in 1950 was 67; average age today: 62,

But just cutting entitlement spending has its own drawbacks: Half of all income growth consumers have had since fiscal crisis has come from federal government transfer payments—cut back on them and you increase the chances of recession, he argues.

8:40 AM, CDT, Oct. 4, James J. Green:

Russ Koesterich,  global chief investment strategist of BlackRock, speaking at the opening keynote session on day two of the 2012 Morningstar ETF Invest conference, says Europe may not be completely out of the woods, but the Europeans have mitigated tail risk. Risk, he suggests, is moving away from Europe toward the U.S.

“We’ve never seen such high debt levels in peacetime,” he began, “we’ve never seen the Fed with $3 trillion on its balance sheet.” The main tail risk in the U.S. is government debt and the fiscal cliff. It would have been better to tackle the government debt issue in the 1990s when the economy was growing at a 4% to 5% rate. At the current growth rate of 2%, however, Koesterich says “growth is so slow that any exogeneous shock could push us back into recession.”

So how to build portfolios at such a time? “We’re recommending to clients: don’t abandon stocks but allocate to semi-safe havens…think about credit rather than duration in fixed income, and keep some commodities, even gold, in the portfolio.” Advisors should ask themselves, he says “What instruments do you have that can protect purchasing power?”

7:30 AM, CDT, Oct. 4, James J. Green:

The third annual Morningstar ETF Invest conference began on Tuesday afternoon, highlighted by Schwab Chief Market Strategist LizAnn Sonders addressing the current and possibly future states of the economy and the markets.

First up on the first full day of the conference is Russ Koesterich of BlackRock, who will address the possible implications of an Obama second term or a Romney first term for the American economy. The second general session of the morning will have Joanne Hill of ProShares relating the ways that institutional investors are using alternative ETFs to mitigate risk and boost returns.

The lunch speaker is Chris Gardner, the author of the book and film The Pursuit of Happyness.