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Portfolio > ETFs

Experts Agree at Schwab Gathering: More ETFs on the Way

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Since the “dawn of the golden age of ETFs” in 2006, said Morningstar’s Scott Burns, exchange traded funds are proliferating–”showing no signs of slowing down”–while the flow of money into ETFs is “gaining steam” with nearly all months showing positive flows into the investing vehicles. Moreover, Burns said, ETFs are taking assets from individual stocks, bonds, and commodities, not to mention mutual funds. “ETFs are growing nominally,” he said, as both a percentage of the total dollars invested, but also when compared to mutual funds–ETFs now account for 10% of total mutual fund assets.

Burns, director of ETF analysis for Morningstar and editor of Morningstar ETFInvestor, was speaking in his role of moderator of a panel of ETF sponsors and at least one advisor–Tom Lydon–at a meeting for the press hosted by Schwab Investment Management Services in New York on Tuesday, August 10. Schwab has rolled out a suite of ETFs itself over the past year, so why was it hosting a panel of its competitors to discuss the current state and future of ETFs? “We are first and foremost a broker,” said Peter Crawford, the IMS senior VP who leads product management for the Schwab unit, which has $1.5 billion in Schwab-denominated ETFs, while ETF assets held in client accounts at Schwab have grown to $88 billion, or 38% over the year ending June 2010, according to Schwab’s latest ETF Investor Snapshot report.

The conversation began by revisiting the “Mutual funds or ETFs?” debate, with Crawford suggesting that ETFs will continue to dominate in passive investing strategies, while mutual funds will dominate active strategies. “There will be more actively traded ETFs,” Crawford admitted, “but they will be on the margin.”

Ben Fulton, managing director of Invesco Powershares, noted that there remain “some areas that are difficult to index,” while Sue Thompson, managing director of Ishares (now owned by BlackRock) pointed out that in a mutual fund, “your trading costs are shared with other investors in the fund,” while in an ETF, “everyone pays only their own share,” which she suggested is one reason ETFs will continue to grow.

Lydon, president of the RIA firm Global Trends Investments, noted that few money managers can beat the indexes, so “if you can’t beat the market, why not buy it?” His firm started using ETFs for clients, Lydon said, when the mutual fund complexes made it more difficult for a tactical investor like himself to trade; ETFs, by contrast, are by their very nature much more amenable to active traders.

It was left to Crawford to describe the arc of ETF investing, saying they were first used by buy-and-hold investors, gained traction among RIAs, moved into the active trader community of institutions, pension plans, and hedge funds, and now have been embraced “by the mainstream,” i.e., individual investors, many of whom, he noted, are “affluent, sophisticated investors–many retired–who are actively trading ETFs.” There remain plenty of growth opportunities, he concluded, saying that only 14% of Schwab’s retail investors were using ETFs, though 38% of households that use RIAs affiliated with Schwab Advisor Services are invested in ETFs.


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