ETFs are old hat by now, right?
Well, that may be so, but the solidity of their investment industry footprint and the vastness of the investment terrain as yet still unconquered mean investors should brace themselves for another innovation-fueled wave of growth in exchange-traded funds.
Advisors perhaps jaded by the incessant breathlessness that has been the hallmark of these uniquely diversified, tradable, tax-advantaged and generally low-cost funds got a fresh dose of starry-eyed optimism at a future of ETFs panel Monday at ETF.com’s InsideETFs annual conference in Hollywood, Florida.
Vanguard investment strategist Joel Dickson was first to snuff out any potential thoughts of premature aging, telling a packed hall of financial advisors:
“We did research a couple of years ago [that found that] when investors were given a choice between ETFs and funds of a similar type, they were three times more likely to invest in an ETF if they had previously owned an ETF.”
Given a mere 10% investor penetration, the “familiarity effect” Dickson found augurs further expansion as more investors come to know and love the products.
State Street’s Nick Good also noted the “long runway” ETFs still have from a market-penetration perspective, with 1% of the total global fixed income market invested in ETFs and 4% in ETFs on the equities side.
But it’s not just that there’s room for growth; there are factors fueling that growth, such as corporate alliances promoting ETF investment, including State Street’s new partnership with DoubleLine in the actively managed fixed-income space and Fidelity’s partnership with BlackRock.
On the innovation side, Invesco PowerShares’ Dan Draper predicted that “smart beta and high conviction alpha is where things are going to move,” specifying that ETFs, with their lower-cost structure, will be able to “target those active managers providing beta [i.e., closet indexers] at high cost.”
IShares Institutional’s Daniel Gamba shared Draper’s view that innovation will fuel the next wave of ETF growth, saying “when you have industry at $2 trillion, relative to $1 trillion a few years ago, the one-size-fits-all model is gone; people are looking at different uses.
For Gamba that means there will be a greater development of active ETFs and increasing derivatives applications, using ETFs as vehicles to replace futures and swaps.
Precision, in the international sphere, means that investors need not buy a whole package of, say, high-risk emerging markets if they want to fine-tune risk and reward more precisely.
In the same way that one could not buy or short Switzerland before ETFs brought about a targeted Switzerland fund, so too can investors today buy India individually rather than a broader emerging markets fund.
“Who’s going to benefit from lower commodity prices and oil?” Gamba asks. “If you have active views regarding different markets, ETFs are the way to go.”