The growing criticism of exchange traded funds in recent months is off the mark, said Dan Suzuki, portfolio strategist at Richard Bernstein Advisors.
The complaints against ETFs have ranged from claims that they exacerbate volatility, to claims that they suck out market liquidity. But Suzuki thinks the critics are going overboard.
“You have to examine the source” of the criticism, he said at the Inside ETFs conference in Hollywood, Fla. “A lot of the people doing the fearmongering have an interest in old-school ways and are seeing their businesses hurt.”
Suzuki sees a parallel between ETFs and automobiles. Autos create fatalities and pollution. “But who would say that cars haven’t changed the world for the better,” Suzuki said. “It’s the same with ETFs. They are way more positive than negative.”
For example, ETFs can provide price discovery when a market is frozen, as happened in Greece during its financial crisis of 2009-10, Suzuki noted. “The market was shut down, but you could trade in the U.S.” through ETFs. Another strength of ETFs is their usefulness for quantitative traders, he said.
And it’s not as if ETFs rule the world of financial markets. Passive investment strategies account for about 30 percent of the U.S. market, compared with maybe 70 percent in Japan, Suzuki said.
What his firm tries to do is combine active and passive investing, a strategy it calls “pactive.” That’s active management of passive investments. The decision of when to invest in which fund is an important one, Suzuki said. For example, if you choose small-cap stocks over large-caps, your returns can lag for 10 years if you’re wrong.
When it comes to introducing new products to the ETF market now, there’s a Catch-22, he said. “The opportunities are best where no one wants to invest, but ETFs won’t get created where there’s no popularity.” Suzuki said the market could use more environmental/social/governance ETFs and more ETFs consisting of international stocks.
Richard Bernstein Advisors is constructive on the U.S. stock market overall, he said. “The base case is higher, but fundamentals are weakening. Profits are slower. That’s difficult.” Unless this year’s rally can continue, RBA will focus on stable growth and quality stocks. “We think volatility heads higher, and the best hedge is quality,” Suzuki said.
With most of the world seeing a deceleration of growth, “we’re underweight everything but the U.S. and China,” he said. “China is the only quality country in emerging markets.” To be sure, it’s at the center of trade wars and fears of slow growth, Suzuki acknowledged.
“But a lot of the recent slowdown in China has been self-induced,” he said. The country’s debt exploded, and then it had to put policies in place to curb that explosion. “You can’t take liquidity out that fast and not affect growth,” Suzuki said. “Now they realize they went too far and are reversing policy. China is unique as a country that’s hated but stimulating its economy aggressively.”
