The Future of ETFs: Volatility, Rate Hikes and Robos

Four experts closed the Morningstar ETF conference in Chicago with a look at the future of ETFs, as well as some current trends

Left to right: John Wasik; Matt Hougan, ETF.com; Ben Johnson, Morningstar; Tom Lydon, ETF Trends. Left to right: John Wasik; Matt Hougan, ETF.com; Ben Johnson, Morningstar; Tom Lydon, ETF Trends.

Diminished expectations and low cost structures in the markets today are good “in the long term for the ETF industry,” said Matt Hougan, CEO of ETF.com. This optimism was prevalent throughout a panel of exhange-traded fund commentators at the Morningstar ETF Conference in Chicago.

The panel moderated by John F. Wasik, an author and financial journalist, also included Ben Johnson, director of global ETF research at Morningstar and Tom Lydon, editor and publisher of ETF Trends.

Hougan predicted growth of low-volatility funds, noting it was “more important to choose one thing and buy into it…and hold it during difficult periods."

Johnson noted that costs were key and said that some funds are “uber-low cost and in some cases free … that’s where most money will flow.” Lydon thought it was a good time for investors to buy into emerging market and commodity funds.

Investor behavior was a key subject on the panel, especially with recent market volatility. Wasik said that the outflows of money in the past month were happening at the “wrong time. Holding stocks went out of favor … aren’t people getting out at wrong time? How do we nudge them into right behavior?”

Lydon wasn’t sure this was correct. “There is no promise that smart beta or strategic beta performs," he said. "Low volatility is what people understand.”

Bringing up the market correction on Aug. 24, Wasik said a lot of money flowed into alternative investments. “Was that smart money, institutional or retail?”

Hougan said the flows needed to be better interpreted, and were more complex in the alternative space. Johnson noted that, overall, investors didn’t abandon ETFs.

Responding to former Vanguard CEO John Bogle's comment criticizing active management, Johnson was skeptical. “Traders will trade,” he said, noting it didn’t matter if the “flash crash” on Aug. 24 made people uneasy with active investing. “I can break anything, and traders will trade.”

When Wasik injected that a great phone app should be developed that told investors when and how to trade, Johnson responded: “It should simply flash, Don’t Do It.”

So then, Wasik asked, is the industry preventing better trading behavior?

Hougan replied that ETFs were a “tiny fraction of [Aug. 24] crash. Net-net we’re making progress.”

Johnson said the trends were already in place. “Let’s not make things more complex; instead we need to make things simpler for the investor [and] quit speaking Klingon.”

With the possibility of the Federal Reserve raising interest rates later this year, Wasik asked if bond ETFs would become more attractive. (Bond fund ETF assets under management rose 6.85%, or almost $22 billion, in the third quarter, according to ETF.com).

Inflows show that the move from equity to bond funds is already in play, Hougan said. “We still have heroes in the bond market,” he said. “No more in equity; all have died. I’m definitely bullish on bonds.”

Lydon interjected that ProShares Treasury ETFs were good for capturing short-term rate moves.

Another investment trend discussed was the rise of robo-advisors.

“I’m a fervent believer of the robo-advisor movement,” Hougan said. “It will have influence on the ETF space, [and] with big players coming on, it will grow the markets.”

Lydon agreed, saying the robo space “will be huge,” adding it was a good way to prevent investors from “doing something stupid.” He also thought eventually investors would need the human touch, so saw a mix of robo/human investing growing in the next five years.

Hougan disagreed, saying he didn’t think a “human touch” was needed. “I love my robo account,” he said.

-- Check out more ETF-related stories on ThinkAdvisor.

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