This year’s Exchange conference in Miami brought together asset managers, advisors, and more industry leaders to talk ETFs. Perhaps no investing theme permeated the discussion as much as what to do about market concentration risk.
Even AI and bitcoin, though popular, played bit parts relative to the market environment overall. With core allocations particularly vulnerable, that has many investors looking out for the right core equity ETF.
Takeaways From Exchange
Given that discussion, investors may want to consider five ideas offered by various leaders on the core equity ETF topic during the conference. NYSE TV’s Floor Talk program, hosted by Judy Shaw, interviewed a series of asset managers for their thoughts.
Invesco’s Head of Factor and Core Product Strategy, ETF and Index Strategies Nick Kalivas,emphasized the concentration of the cap-weighted S&P 500. A better approach, he suggested, would involve an equal-weighted version of that index.
“People might not know, but if you’re thinking about the Morningstar style box, the cap-weighted S&P 500 is almost into mega-cap, and it’s very growthy,” he said. “The overlap between the S&P 500 Cap Weight and the Nasdaq 100, which is a large growth index, is 45%, which is up 20% from 10 years ago.”
Equal-weighting can help with that concentration risk, Kalivas said. He pointed to the Invesco S&P 500 Equal Weight ETF (RSP) as one option, equal-weighting the S&P 500 for a 20 basis point (bps) fee.
For DoubleLine Deputy CIO Jeffrey Sherman, it’s diversification that can help with a market driven so much by the most expensive stocks.
“What we’re looking to do is try to help investors with some of the diversification, whether that’s diversifying away from some of these exposures through the equity market or investing in those things that can complement those exposures, like fixed income,” he explained.
Core Equity ETF Options
Sherman suggested one of the firm’s newest ETFs, the DoubleLine Fortune 500 Equal Weight ETF (DFVE). It charges a 20 bps fee and tracks an index crafted from the Fortune 500 that applies an equal-weight approach. For both DFVE and RSP, an equal-weight approach could help limit concentration risks.
T. Rowe Price Senior ETF Specialist Chris Murphy emphasized on Floor Talk the potential of small-caps. Small-caps provide some degree of inherent diversification away from a standard core equity exposure. And with an active approach, they can carry a lot of weight in a portfolio.
He underlined the potential value-add active can provide to a small-cap view. The T. Rowe Price Small-Mid Cap ETF (TMSL) charges a 55 bps fee to actively invest in small- and midcap names.
Process, Core Equity, and More
Fidelity Investments’ Head of ETF Management and Strategy Greg Friedman noted to Shaw that it is diversification via active and smart beta where the firm looks to help.
“What clients I think have been looking for is ‘how do I diversify; how do I get a true portfolio of complementing alpha and beta?’” he said.
The firm’s fundamental research capabilities have helped it launch its Enhanced ETFs. Friedman called these “passive plus” strategies that can potentially serve as a core equity ETF allocation.
Finally, Goldman Sachs Asset Management Global Head of Exchange Traded Distribution Brendan McCarthy explained that his shop’s goal is to deliver strategies as “tools” to investors. That includes smart beta and active options. The firm recently launched a new small-cap strategy, the Goldman Sachs Asset Management Small Cap Core ETF (GSC).
Each firm presents a different idea of the right core equity ETF solution for investors. From active to small-cap and everything in between, investors have plenty of options available to them.
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