Technology has taken over many jobs while shifting a bit of the work to the consumer. Grocery stores employ self-checkouts, which force us to learn the best way to scan a banana. Car-sharing services allow us to skip a taxi and drive through rush-hour ourselves. This trend is no different in finance, and that’s not a bad thing.
While your hot-stock-tip provider may not appreciate the change, diversified low-cost portfolios are booming in popularity. And there are many ways to profit.
Automated financial advice
Having somebody actively manage your portfolio costs money, whether you have a personal financial advisor who takes a percentage of assets or invest in mutual funds yourself and pay their expensive fees. Increasingly, however, people are shunning higher fees in favor of cheaper funds that typically hold a general basket of stocks. As Joe Davis and Andy Clarke of Vanguard report, only 5% of mutual fund and ETF assets in 1995 were in funds that charged an expense ratio of 0.25% or less. In 2012, that number was 25%.
As Davis writes, “We’re in the second or third inning of a remarkable shift toward broadly diversified, low-cost portfolios, an idea that has the power to change our lives for the better.”
In another study, Vanguard writes, “69% of U.S. large-cap value equity funds underperformed their benchmarks over the ten years ended Dec. 31, 2012.” It’s a continuing fact that a majority of actively managed funds fail to beat benchmarks, especially when adding in their typically high expenses.
More investors are realizing this, which gives the companies who run these funds a huge opportunity.
A booming industry
With this concentration on avoiding high fees while easily diversifying, the ETF industry has boomed. WisdomTree Financial has $23 billion in managed assets, up from $1 billion in 2006. And it is only the fifth-largest provider of ETFs. The other top five ETF providers are as follows.
|Company||Assets Under Management (Billions)||P/E||Average ETF Expense Ratio|
|BlackRock, Inc. (NYSE:BLK)‘s iShares||$598.8||20||0.40%|
|State Street Corporation (NYSE:STT)||$332.9||16||0.36%|
|Invesco Ltd. (NYSE:IVZ)‘s PowerShares||$67.1||22||0.56%|
Larger corporations over $10 billion in market capitalization, such as BlackRock, Inc. (NYSE:BLK), State Street Corporation (NYSE:STT), and Invesco Ltd. (NYSE:IVZ), are of course less affected by the growth of their ETF business, and their stocks are priced accordingly. Being smaller, WisdomTree can grow much faster, and its relatively expensive stock reflects this.