By Ari I. Weinberg
There is a peculiar mystery going on inside the world of
exchange-traded funds.
ETFs are hugely popular with investors, and part of their appeal
is how simple they are to buy and build a portfolio around. Yet
there are few options out there for asset-allocation ETFs -- ones
that contain a mix of investments, like the familiar target-date or
target-risk mutual funds in retirement accounts. And the
asset-allocation options that are in the market now haven't drawn a
lot of interest.
Why have asset-allocation funds been pretty much immune to the
ETF fervor? The answer can be found in the nature of retirement
accounts, where most of these asset-allocation funds are found.
The retirement advantage
Collectively, traditional asset-allocation mutual funds -- which
include target retirement-date funds, target-risk funds and
balanced funds -- hold $1.3 trillion, according to Morningstar
Direct. And those funds are a widespread option inside of
retirement plans, including IRAs. They got a huge boost in 2006
with the Pension Protection Act, which mandated that 401(k) plans
put participants in a qualified default investment alternative if
they don't make an active choice. Often, that meant an
asset-allocation vehicle.
The upshot is that when ETF companies tried to break into the
asset-allocation world a few years ago, they found that the largest
market was already dominated by mutual funds.
What's more, the usual tax benefits of ETFs aren't as
significant inside of retirement plans, because those accounts are
tax-advantaged to begin with.
So, asset-allocation ETFs haven't found much of an audience. In
fact, two of the earliest entrants into the ETF asset-allocation
field, DWS and BlackRock, which offered suites of target-date
products, closed those funds four and five years ago,
respectively.
The persistent problem
According to research firm CFRA, there are still only about 40
asset-allocation funds available as ETFs, primarily constructed as
"ETFs of ETFs" -- in other words, an ETF holding other ETFs.
Asset-allocation ETFs manage just $7.5 billion in assets, with
three iShares Core ETFs from BlackRock (Growth, Moderate, and
Aggressive) each holding about $1 billion, and another
(Conservative) at $535 million. Net expense ratios run from 0.2% to
over 2%. ETFs have total assets of $4 trillion.
"ETF issuers have rushed into a lot of areas, such as factor
investing and thematics," says Todd Rosenbluth, head of ETF and
mutual-fund research for CFRA in New York, "but allocation funds
remain very small relative to the opportunity."
In addition to the retirement-plan problem, some experts and ETF
executives argue that there is another reason for the lack of
asset-allocation ETFs.
Fund managers have been focused in recent years on selling ETF
to, and through, financial advisers, says Rick Ferri of Ferri
Investment Solutions. That means, he says, that many ETF companies
don't want to introduce all-in-one products that compete with those
advisers, who plan out portfolios for clients.
Similarly, he says, it may not be in the interest of financial
advisers to push ETFs that do the asset allocation for investors.
Mr. Ferri, who provides portfolio advice but doesn't manage client
money, says advisers and asset managers can make investment
solutions more complicated than they need to be to justify their
fee. This includes frequent rebalancing. Balanced ETFs would
eliminate this, which is why "those advisers are not fans."
(Of course, the same is true of traditional asset-allocation
mutual funds -- but they are buoyed by their massive advantage in
retirement accounts and don't need strong support from financial
advisers to thrive.)
In December 2014, Meb Faber, chief executive officer and chief
investment officer of Cambria Investment Management, was ready to
"disrupt the traditional high-fee asset-allocation fund universe"
when his firm launched Cambria Global Asset Allocation ETF (GAA),
the first of Cambria's three allocation ETFs. But breaking through
has been a challenge.
"No broker or adviser wants to put a client in just one fund,"
says Mr. Faber, who has put most of his publicly traded investments
into his Cambria Trinity ETF (TRTY). Since its launch in September
2018, it has accumulated $35 million in assets.
A guiding hand
Kostya Etus, portfolio manager, CLS Investments, a $9 billion
investment manager in Omaha, disagrees that financial advisers shun
broad ETFs out of self-interest. Rather, he says, financial
advisers are able to assess investments for specific clients with
specific needs, as opposed to the broadly generalized approach of
an asset-allocation product. Advisers can also can choose the best
ETFs, no matter who issues them -- which reduces bias. He
attributes the advantage of conventional asset-allocation mutual
funds largely to their entrenched position in retirement plans.
Despite the obstacles, some of the largest ETF issuers are going
ahead with the all-in-one ideas. Along with BlackRock, State Street
Corp.'s State Street Global Advisors and Invesco offer suites of
allocation ETFs. Vanguard Group, which offers balanced mutual funds
for as little at 0.07%, doesn't currently have an all-in-one ETF in
the U.S., but has a handful of allocation ETFs in Canada. The
products currently have assets of $2.1 billion Canadian (US$1.5
billion).
"The traditional buyer of balanced funds hasn't shown up yet in
the U.S. ETF market," says Rich Powers, head of ETF product
management for Vanguard, "but we're still in the early
innings."
Mr. Weinberg is a writer in Connecticut. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
September 08, 2019 22:25 ET (02:25 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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