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A Brief History of ETFs: From TIPS to Levered Inverse Replication

A Brief History of ETFs: From TIPS to Levered Inverse Replication. Barry Gordon President and CEO. September 10, 2014. Agenda. Evolution of the ETF Market Intellectual Underpinnings Fixed Income Recent Developments Where to From Here?. Evolution of the ETF Marketplace.

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A Brief History of ETFs: From TIPS to Levered Inverse Replication

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  1. A Brief History of ETFs: From TIPS to Levered Inverse Replication Barry Gordon President and CEO September 10, 2014

  2. Agenda • Evolution of the ETF Market • Intellectual Underpinnings • Fixed Income • Recent Developments • Where to From Here?

  3. Evolution of the ETF Marketplace Current State of the ETF Market • ETFs are available that track investments in all liquid asset classes – equities, fixed income, commodities and currencies. • TIPs very first ETF • Variations to achieve either long or short exposure to the underlying, including on a levered basis. • Active and Passive variants • Structural advantages to users • Price Maker vs. Price Taker • Bulk order capabilities • Size of Market • Total Global Capitalization of over $2.25 Trillion as at December 31, 2013 • Canadian ETF Market of over $63 billion • Total Value Traded of over $15.7 Trillion in 2013

  4. The Global ETF Industry Growth of ETFs Globally (AUM in millions)

  5. The Canadian ETF Industry Growth of ETFs in Canada (AUM in millions)

  6. Perspective – Relative Size of Markets Global equity market = $53T Global fixed income market = $100T Equity Mutual Funds Fixed Income Mutual Funds

  7. Intellectual Underpinnings • Equity ETF Evolution mirrors MPT Debate • Beta = Broad capitalization weighted indexation • Product extension into Sectors, Sub-Sector, Industry • Macro Consistent • Low cost • Persistent Flaws in CAPM – Challenge to Orthodoxy • Existence of Value, Momentum, Size anomalous returns • Different Weighting Methodologies

  8. Fixed Income • Evolved Similarly to Equity • Broad Benchmark Developed Market Indices weighted on basis of face value • Expanded beyond Investment Grade Credit • Strategy ETFs • Ladder • Bullet • Barbell • Challenges Emerge • Opaque Markets • OTC Markets anathema to a structure that thrives on transparency • Illiquid Assets? • Bank Loans • Viatical Settlements • Hedging Proxies

  9. Recent Developments • Derivatives - Tools to Facilitate/Enhance Replication • Synthetic exposure • Derivative Overlays • Leveraged and Short Exposure • Boon or Bane? • Will ETF’s suffer from Over-Engineering? • In rapid growth markets like ETFs, we often observe the “build it and they will come” phenomenon. • There have been and will continue to be ETFs which never reach their desired potential

  10. Where to From Here? • Evolving demand from retail, advisors and institutions • Tools versus solutions • Active Versus Passive • Can Active add Alpha when costs are neutral?

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