Morningstar ETF strategist Scott Burns got a promotion on Monday to director of fund research for the Chicago-based firm, and will lead teams in the United States and Canada. But that didn’t stop him from sounding off about his first love, exchange-traded funds, at the company’s annual investment conference in the Windy City on Wednesday.
When asked by AdvisorOne in an exclusive interview about the widely held prediction that mass consolidation would occur in the ETF space, and if it’s yet happened, Burns (left) responded, “There’s a certain level of creative destruction that never happened all at once in the mutual fund space. Creative destruction happens in the mutual fund space, but it can be masked easier by rolling closed funds into other funds, for instance. The rapid maturation of the ETF space meant that the creative destruction would be just as rapid—and more high profile.”
For those advisors that are looking to use mutual funds as straight trading substitutes, as opposed to those that want to use them as straight mutual fund substitutes, he said ETF companies will “keep their menu options open” and not consolidate, for the simple fact that the companies can’t predict what geographical market will hit when, “so they want to be ready for when Malaysia, for instance, decides to take off.”
So where are investors currently finding alpha in the ETF space?
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“Investors are looking for broader solutions; those with exposure to global markets, as well as continued demand for alternative products,” he said. “You have two types of ETF products right now; the traditional structured products that came on the exchange, and then you have more of the ETF “tools” that are being developed. The ETF tools will never be part of a core portfolio. As it is often said, ETFs began as structured products that came on the market and they remain structured products on the market.”