ETFs ‘Just in the Third Inning’

Advisors who have watched the disruption ETFs brought about in their early days, and their explosive growth since, may be wondering if a market that in 2013 reached past $1 trillion in assets is now ready to slow down.

“Indexing has not run its course. We’re just in the third inning,” comes the reply from Nasdaq’s John Jacobs, who, in a highly-caffeinated phone interview with ThinkAdvisor, embodied the notion that ETFs won’t be slowing down if he’s in a position to do anything about it.

And, as the head of the exchange’s information products division, which creates and licenses indexes, Jacobs offers a key position in the ETF universe. He also manages to keep busy.

 “Two years ago I had 2,000 indexes; today I have 41,000. We rolled out 13,000 last week [in the global equities space],” says Jacobs.

So what does he see, from his perch atop the Nasdaq, that gives him confidence we’re just a third of the way through the game?

“We still have huge international markets to go. We have not exhausted asset classes outside of equities — in fixed income, currency and commodities. We haven’t penetrated defined contribution yet — there are only a handful of 401(k) plans that accept ETFs today. And pension plans and other asset owners who traditionally have had a consultant come in to manage the money are now demanding a combination of active and passive strategies — and we provide the passive,” Jacobs exuberantly details.

Nasdaq OMX is one of the titans of the indexing business, but its size has not slowed it down.

“We are probably the fastest growing of the major indexers,” Jacobs says, noting a recent news report that its rival Standard & Poor’s expanded by a whopping 43% last year, but helpfully adding that Nasdaq’s exchange-traded product assets increased over 68%, from $54.9 billion to $92.3 billion, in 2013.

Nasdaq, whose claim to fame more than a decade ago was its QQQ index of the top 100 stocks on its high-tech-oriented exchange, has gone from that single index to 151 exchange-traded products today.

Within that large product pool, founded on traditional market-cap-weighted beta products, Jacobs says Nasdaq’s greatest growth has been in the smart beta area.

“This past year, one of the hot areas for us [has been in the] the dividend achievers,” he says. “We saw explosive growth as people were looking for yield. It’s a huge opportunity and that’s going to continue,” he says, citing Vanguard and PowerShares ETFs as licensees of these indexes, which group stocks with at least 10 consecutive years of increasing annual dividend payments.

Another growth area, also for yield-hungry investors, was its launch last year of BulletShares, an innovative fixed maturity corporate bond indexes.