Exchange-traded funds (ETFs) are growing faster than the internet and IROs should embrace them as they offer more opportunities than problems, two experts say.
In yesterday’s 30-minute IR Magazine Webinar, Eric Balchunas, a senior ETF analyst for Bloomberg, and Irene Bauer, chief investment officer and founding partner of Twenty20 Investments, discussed the $3 tn ETF industry.
There are four new ETFs launched every day and more than 7,000 ETFs already in existence, Balchunas said. This means due diligence is very, he added. The growth in the industry is unlikely to fade as millennials make up 40 percent of investors and ETFs fit into ‘their technological world’.
Increasingly, the ETFs being launched are smart beta, which now account for more than 50 percent of new ETFs. Smart beta strategies, like ETFs, follow indices but add extra rules to make the investment more efficient. So a smart beta strategy will not invest in just the FTSE 100 according to market cap, but could also weight the investment according to earnings.
‘They are a twist on a market cap-weighted index,’ explained Balchunas. ‘It is essentially an alternative way to weight the index.’
Bauer added: ‘It’s not a bad thing if an ETF holds your company; it could just mean you are part of the S&P 500.’
Both experts recommended IROs get in touch with both the ETF and the index provider if they find their company is held by one of these funds. Providers ‘don’t expect much from the IR teams,’ Bauer said, ‘so it’s up to the IR person to be proactive and talk to the ETF or index provider.’
Bauer recommended looking at getting into an SRI index, as this is a growing area. She added that this is a beneficial marketing tool for a company’s website.
Both experts said there are few drawbacks to ETFs investing in a company’s stock. ‘It’s good for a company and the more stocks that are bought, the better,’ said Bauer. ‘In general there isn’t a lot that will happen to your stock price that is negative.’
Balchunas pointed out that while ETFs trade a lot they are still ‘a drop in the bucket’ in terms of market volatility. ‘The stock will affect the ETF more than vice versa,’ he explained.
There should be more concerns, Bauer added, if you are owned by several hedge funds. ‘When it comes to voting rights, they are more active,’ she said. ‘ETF providers tend to act like a corporate company.’
