There are more than 2,000 exchange-traded funds right now. Is that enough?
“It’s easy to put the devil’s advocate hat on and say, ‘Enough is enough. Do we really need ETF 2,100, ETF 2,500?,” Dave Nadig, CEO of ETF.com, said. “Is there anything left to invest in that any rational investor would care about?’”
Nadig posed this question to a panel of experts brought together by State Street Global Advisors ahead of the 25th anniversary of the world’s first ETF — the SPDR S&P 500 ETF (SPY).
According to Jim Ross, chairman of the global SPDR business, there’s “always room” for more ETFs. However, it’s not as easy to launch new ETFs as it used to be.
“I think the challenge of launching an ETF today is you need to have a really, really strong plan around it,” Ross said. “The days of … 10-15 years ago when you could just take a bet and flip something up [are gone].”
The trouble with doing that today, according to Ross, is that the distribution platforms — like Merrill and Schwab — want to see trading volume and a significant conviction around a new launch.
“It’s a little bit of a chicken-and-egg game now,” Ross explained.
What Ross means by “conviction” is that the launch is coordinated across the firm from a product and marketing standpoint. “Your distribution force is on it, your advertisers are on it, [and] you are 100% ‘this is what we’re doing for the next X weeks, months, whatever it takes,’” Ross explained. “Because it’s so important to get that ETF out.”
For State Street, this does mean that the pace at which it launches new ETFs has slowed down.
“I’m just speaking for us, but we’ve launched fewer ETFs in 2016 and 2017 than we closed,” Ross said. “It has slowed down for us, and that is not unintentional. But when we go to market with something, it is with significant conviction.”
Meanwhile, two asset managers who use a significant amount of ETFs — Josh Brown, CEO of Ritholtz Wealth Management, and Joseph Smith, senior market strategist at CLS Investments — have slightly differing views on the abundance of ETFs.
Brown, who says Ritholtz is about 45% ETFs as a firm, doesn’t know if there is a “huge green field anymore” for new ETFs.
“I think you get to a point where there’s only 3,800 stocks now, how many times can you slice and dice them in different order?” he said, adding that “there’s been some spectacular success already, and let’s recognize that it can’t go on forever.”
In particular, Brown takes a hard stance against new factor ETFs, saying that “the factor thing has kind of run its course.”
“They’re creating new factors that really are very flimsy,” he explained. “I don’t think we’ll see more of those.”
However, Brown does see potential in very niche new products.
“I think maybe where there’s room are the ETFs where somebody wants to make a really big bet, a really concentrated product, or a really strange way to weight the holdings far away from market cap weighting,” he said.
Although he admits products like this are never going to be scale. Adding that, big-bet, concentrated products are “always going to be niche.”
“They might be very profitable — especially if they hit within the first 24-36 months — but they’re never going to be a SPDR fund,” Brown said.
Smith, who says close to 95% of CLS Investments’ book is effectively ETF-based portfolios, has a more optimistic view on the future of ETFs. He thinks there’s “a lot more opportunity out there than most people would expect.”
“The thing that you’ve probably seen with ETFs is that we’ve gone from starting with the universe of slicing and dicing every single known index that people have long associated for benchmarking purposes or passive investing purposes as a way to provide exposure in the marketplace, to thinking about more of the role in terms of smart beta,” Smith explained.
According to Smith, the smart beta area within ETFs is still untapped.
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