LaSalla on Adding Allocations to Alternatives (Audio)

we were talking about the bond market. You tell me you're the expert. Uh, Have we seen a correction in yields and prices or is just a little reversal and yells are gonna keep rising again? You know, Kathleen, it's hard to tell, only because my senses. Every time we see new loads on the yield um, it feels like we've really bottomed. But when you look at this enormous amount of liquidity coming in from him just mentioned several central banks, Clearly Europe is going to be in continued

ease mode. Bank of Japan is going to be very very accommodative. It's very hard to see how rates can really move with any sort of Even even if the FED raises rates before the end of the year, it's hard to see with all the liquidity, where else is it going to go. So I think it's really hard to make a case for higher interest rates. UM. I think they're just gonna stay in this very tight range.

What's the theme this year? Because you're talking about a low interest rate environment, many people missed the bond market rally. They thought that rates were gonna go higher. They haven't yet, as you just described. So what's the big theme? What's the big concern? Because we're here with I don't tell us how many we've got pro shares, we've got reality shares, We've got a whole group of et F sponsors here.

What's the theme? Well, well, the theme is real. Well there's a couple of things for the three hundred participants that are here with us for this conference. It really is around where do we t f s play a part in the portfolio? But do you have brought a question about what is the theme in the markets? To me, it's still uncertainty. It's not knowing UM the Fed. The thinking about the FED and what the Fed's next action just seems to take all the oxygen out of out

of everything else, UM fundamentals seem to be okay. I think the story is in earnings that we've gotten mixed messages type of economic growth. So until we get the Feds speak, if you will, out of the way, it's hard to see the markets really react with any sort of connection. So it's been volatility but really not going

anywhere fast. What we see, what we're hearing at the conference today is around There's there's two big themes for ETF issues and for investors and e t f s. One is the d O L. White Deal of Fiduciary Standard Department of Labor, the new fiduciary standards for registered investment advisors. Yes, and and basically advisors and wealth managers now have to really act in the client's best interest, which I think a lot have done in the past,

but it's now been codified. But what that means is UM they really have to look at not only put portfolio performance risk, but also cost for continuing our very special live broadcast here in Data Point, California or at the Monarch Beach Resource for B and Y Melons et F Exchange sixteen looking at ideas innovation interaction in this growing doesn't the right word. I think it's kind of

an exploding industry. Our guest is Frank las Sala. Frank, of course, is CEO of Global Structured Products and Alternative Investment Services at b n Y Melon So Frank regarding UH the markets, uncertainty, volatility, central banks, you know, speak, don't speak, move, don't move. It's really it's it's a it's a tough environment for a lot of people trying to make money. So what are people What do you think?

Was one of the some of the important important questions here at this conference about the kinds of e T s that are out there, how they can be used to make money to protect money at a time like this. Well, Kathleen, I mean, fundamentals still count right, and we are now in this seven or eight year of this almost zero interest rate environment, and as we've talked about many times, investors need to get returned, and so they're looking at

different alternatives. And one of the things we've talked about here and at the conferences, what do ETFs provide investors as an alternative to straight equity purchase debt debt instruments which are really not giving them a return. And what the industry is trying to do with the e t F industry is trying to do is developed products, capability solutions that investors can go into and get a better UH risk adjusted return. And e t f s, by

their inherent nature do provide some benefits. Ay, you get daily liquidity, which is very very important for many investors. They just want that ability to get in and out when they need to. It is relatively more tax efficient because of the way e t f s create and redeem, So most investors don't even realize that, but there is a tax benefit to being in an e t F. Two other assets quite futral fund, right, I mean, like

of a mutual fund. Even if you're still invested in the mutual fund and you've selld you've sold no shares, you're gonna end up with a tax liability. If the mutual fund has a tax liability, that's that's not the same with the t F. You're in control of when that tax event happens. And that helps investors, you know,

on an after tax return, which is obviously important. Um And and the other thing is, as we said, what the big theme that we're really talking about is this whole department of labor him as you mentioned earlier, this department of labor fiduciary rule, where we think more advisors will look into e t F as an alternative for their end investor. The way we see the e t F market right now, it's roughly a three point one

trillion a global market. Most of that two thirds of it is here in the United States, about five billions in Europe, and there's in Canada and Japan makeup the majority of the rest. We think that will grow, and our current data is suggesting that that could grow as much as to ten trillion dollars in the next five years. So in terms of asset class growth, e t f s will certainly become a bigger part of the overall

investor portfolio. And what that will do is probably induce many of the issues that are here to think about more creative ways how they can issue ETFs that are contoured tour investor interest. So uh speaking to investor interest in this this market, I mean that if we had if this for TV we get to occur, the growth is just so almost straight up right for a lot of e t s and spreading around the world as you said, where where are the mark what kind of

e t F concentrations exists? What are the we're just saying like or how do you break it down for is like we're the majority of money as in e t F s and what are some of the new ones that are small now where you see possible growth. Well, as we talked about this morning, um, the biggest concentration of e t F investment is in the passive low cost indexes. So you buy an SMPI index at Dow

thirty index to q q Q is one. As you looking at nastack get the attack of a lot of investors are going for a very low cost, safe play, and that's been like that for a while. What we many of the issues that I hear at all at our conference are really more in you know, the hybrid ETF. So it's more like smart beta. It's not exactly linked, although it's correlated to indexes, it's actively managed in the

in the to anticipate better returns for investors. So we think that although right now, particularly just after the Department of Labors fiduciary standards have changed, we've seen a lot of flow into passive, passive low cost we think as investors and advisors get more comfortable with the array of et F products, we will begin to see a shift more toward the hybrid or smart beta type ETF products.

I just want to challenge a little bit on this idea that you know, when you talk about let's say a plain vanilla exchange traded fund like the Triple Q or you know that is long equities that may be diversive hide within equities, But if that's all you've got in your portfolio, you're not diversified. Your exposed to the volatility in stocks. Yes, that's exactly right, I mean, and

so that's what you're trying to deal with. But a good advisor knows that and construct an overall portfolio of which that particular et F like you've mentioned UH is part of it. But you've got to look at the whole portfolio. And that doesn't mean you get out of government bonds. It doesn't mean you maybe get out of equities,

you know, straight equity purchases. But it's got to be constructed holistically, and you have to be educated, right because if you may end up with an e t F that all it really does is mitigate the risk that you have in something else but doesn't produce great returns, but that's not what it's designed to do in the portfolio.

That's exactly right. And and and we see more interest in the advisor community to really look into e t F s and to get educated, as you say, because the end investor needs to be educated, and until he or she is, it's hard for them to comfortable to see it in their portfolio. But the general attributes of the of e t F s um I think are enough and in many cases superior, so that investors should really consider them well done. All right, Well, we've got a lot to learn here at the e t F Symposium,

the b n Y Melan et F Symposium. I want to thank you very much. Frankly sala He is the chief executive of Global Structured Products Alternative Investment Services at b n Y Melon. I'm PIM Fox, my co host Kathleen Hayes coming up more on the world of exchange traded funds. And you know what we'll define smart beta. This is Bloomberg