It’s no question that exchange-traded funds have become increasingly popular.
Shundrawn Thomas, head of the funds and managed accounts group at Northern Trust Asset Management, believes this trend will continue.
“This is not a passing fad. This is not cyclical in nature,” he told an audience at the Inside ETFs conference in Hollywood, Florida.
Speaking specifically to advisors and individuals who build portfolios for investor clients, Thomas outlined what he considers five “irrefutable” trends that will “definitively” increase advisors’ utilization of ETFs:
1. The retirement savings gap
Individuals are living longer, and the number of individuals with defined benefit plans has dropped. In addition, investment return expectations have greatly fallen.
“We went from a period of time in the previous 40 years where real returns in the equity markets were 7% … and our expectations today range from 4.5-5%,” Thomas said.
All of these things have led to what Thomas refers to as “the retirement savings gap.”
“Investors have set far too little aside to meet their investment goals or expectations,” he said. “If you’re in the investment advisory business … this suggests a significant opportunity for those that are effective providers in this business.”
The reason Thomas believes this will lead to an increased use of ETFs is largely because of the built-in benefits of these funds – in particular, transparency.
“If you’re an advisor, transparency can … provide an enhanced level of trust,” Thomas said.
He added that simple, accessible and transparent investment vehicles can help build trust “in a world where people are trusting all things – including their financial advisor – less.”
2. Long live fixed income.
In 2016, according to Thomas, there were record inflows into fixed income ETFs at $82 billion. ETFs are also increasingly taking share from fixed income mutual funds.
“There are certain prevailing trends which drive flows into fixed income that have nothing to do with interest rates or the cyclicality of the environment,” Thomas said.
Thomas attributes the drive into fixed income to an increasing demand for income generation, risk mitigation and the ability to preserve capital.
“Think about the fact that we had baby boomers begin to retire in 2011, and, as that increases, we have more and more needs for income,” Thomas said. “Think about the fact that, counter to prior generations, millennials are actually more risk averse in their investment strategies. So they are actually using fixed income strategies more than we would have predicted they would.”
Institutions, Thomas said, are using fixed income to offset or hedge liabilities or in some ways inoculate their exposure to certain liabilities altogether.
ETFs in particular are in demand as a fixed income vehicle because they provide liquidity and trade on exchanges which can offset fixed income’s “highly illiquid” qualities.
“Without question we will be using more fixed income ETFs in portfolios,” Thomas said.