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By Andrew Gogerty | 10-04-2012 12:30 PM

Are ETFs a Blessing and a Curse for Yield-Seekers?

ETFs allow fixed-income investors to put money into markets that were previously inaccessible, but the abundance of funds can complicate the decision-making process, says Wela Strategies' Mitch Reiner.

Andrew Gogerty: Hi. This is Andrew Gogerty, coming to you from the Morningstar ETF Invest Conference. We are talking today about fixed income. The S&P 500 is up double digits this year, but one of the bigger trends in the ETF market is the growing depth and breadth of ETFs available to investors. And joining me today for perspective on this current trend is Mitch Reiner, managing partner from Wela Strategies.

Mitch, thanks for joining me today.

Reiner: Thanks for having me.

Gogerty: So, we have the fiscal situation, but yet the S&P is still up double digits this year. EAFE emerging-markets stocks are still up double digits, and lot of people are moving back to U.S. equities, at least in the ETF-managed portfolios space. What are some of the key drivers inside fixed income? It's not growing, but it's still there and still a core part of lot of portfolios. What are those themes this year?

Reiner: I'd say, more than anything, it's the hunger for yield. You can't find yield out there. It's either people who have been sitting in cash because they are risk-averse for a long time and now they need some yield. So they are begging; they are saying, "I am tired of earning zero." The folks that have been buying certificates of deposit four or five years ago and had 4.5% yields, they're not getting those anymore. Those are rolling out $100,000, $200,000 lots. Where do I put that money? So I think that is the big desire and drive for yield is that the baby boomers are now having some cash that they are tired of earning zero on and what Bernanke has been doing is working there. He has getting people to take a little bit more risk.

Gogerty: One of things about risk, and it's a different risk than what we had today or even a few years ago, is the fixed-income ETF market is changing. You are getting more rollouts; you are getting access to parts of the world that even frankly on the individual security side were so expensive to go to. But now you're getting it in a cost-efficient way. What is that mean for fixed-income investing going forward? Does it change it, or does it just simply give you a bigger toolbox?

Reiner: Definitely as a strategist, it gives us a bigger toolbox, and I think that it is necessary. And it's great for us to have that availability. I mean how else were we able to gain that kind of exposure in the past? Buying individual bonds is just an inefficient process. With these fixed-income ETFs, it's much more efficient.

However, the problem is now its creating a more choice and more ETFs, and it's already in an abundant environment that I think for the retail investor it's difficult to grasp, "Where should I go; where should I put my money?" And I think that that is going to continue encouraging the need for strategists to bundle those together. I think it's great; it keep costs low. It allows the individual retail investor to get access to strategists like us who keep cost low with ETFs, but at the same time, it complicates things because there are so many now. I mean when you slice the high-yield market up into seven different tranches, you're going to confuse the retail investor and they may invest in the wrong area that they may want to be investing in.

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