Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.
FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.
Charles Schwab may have just changed market access forever. The giant custodian and broker-dealer just announced that it was eliminating all trading commission on stocks, ETFs, and options. It is unclear if it is doing the same for advisors on its platform, but it said it would extend the offer to clients of RIAs who trade on its platforms. TD Ameritrade immediately matched Schwab’s offer within just a few hours. Following the announcements, brokerage stocks plunged. TDA fell about 26% and E*Trade fell 16% to new 52-week lows. Estimates are that the change in fees will depress both TDA and E*Trade’s earnings by 22%.
FINSUM: This is a game-changing move. Hopefully they will extend this to all trades for advisors. This is a brutally competitive landscape and retail investors and advisors are seeing the benefits.
It had seemed somewhat of a formality to this point, but it is now official: Eugene Scalia has been confirmed by the Senate as the head of the Department of Labor. Scalia has long been a legal crusader against both financial regulations and worker’s rights, and will now take the helm of what is likely to be a very different Department of Justice. This has made opponents of the the fiduciary rule 2.0 cheer. However, Scalia announced recently he may have to recuse himself from being involved in that regulation given government ethics guidelines. Still, many argue that his influence will mean the DOL moves in a much more conservative direction on all fronts.
FINSUM: The fiduciary rule seems like the biggest thing the DOL has going at the moment (at least it seems that way if you are in wealth management). This seems to be backed up by how much political attention it is getting. It is hard to see him not being involved, or at least heavily influencing the approach, even if he is not directly taking part.
The world’s biggest family offices are feeling very bearish. A new study by UBS found that over half of them are expecting a recession and over 40% of them are increasing their cash reserves. 45% are taking steps to mitigate risk. Family offices have struggled in the last year, averaging only a ~5% return; much lower than the 9-13% returns they typically target.
FINSUM: Normally speaking we might think this is a good counter-indicator, but family offices represent so much AUM that they could have a real impact on the market.
For the last couple of months it has been pretty easy to assume that the new version of the DOL’s fiduciary rule would not have nearly as heavy a hand as the first iteration. Most have thought it would likely sing to the same tune as the SEC’s best interest rule. One of the integral reasons for this view is that the DOL is now under the leadership of Eugene Scalia, son of Antonin Scalia, the former of which is one of the top securities lawyers in the country and long a fierce critic of the fiduciary rule. However, a major new development this week—Scalia says he may have to recuse himself from the whole fiduciary rule process because of federal ethics rules. Scalia was part of the lawsuit that defeated the rule last year, which is the reason for the recusal.
FINSUM: It now seems very likely that Scalia won’t be leading this process, which means it is commensurately more likely the DOL rule 2.0 could be much tougher than expected.
It has been a decade in the making, but it finally, unceremoniously, happened. The AUM in passive investment vehicles, like ETFs, has finally overtaken that in actively managed ones, like mutual funds. As of August 31, money in passive funds totaled $4.27 tn, just a touch higher than the $4.25 tn in actively-managed funds. In a good summary of the overall change in landscape, the Wall Street Journal says “That shift lowered the price of investing for individuals, reduced the influence of stock pickers and turned a handful of Wall Street outsiders into the biggest power brokers in the industry”.
FINSUM: Every advisor reading this column knows exactly why this happened, but it is nonetheless a landmark moment. It is also perhaps a warning sign—which side is driving the market?