Innovation in the exchange-traded fund industry had stagnated; fresh thinking was overdue, Bruce Bond, ETF pioneer and co-founder of PowerShares, argued a few years after selling his firm to Invesco. Bond, retired, was busy building a hunting and fishing ranch. The groundbreaker talks about the ETF business yesterday, today and tomorrow in an interview with ThinkAdvisor.
At PowerShares, co-founded with John Southard, Bond created the first smart beta ETFs, the first active ETFs, the ETF of ETFs and non-gold commodities ETFs, among other firsts.
Now unconventional thinker Bond is back, running a new firm and creating new ETFs. Last week his Innovator Defined Outcome ETFs co-won ETF.com’s “Most Innovative New ETF of the Year” award.
In 2006, Bond and Southard sold the market-leading business they’d launched four years earlier to Invesco. By 2009, Bond had stepped down as PowerShares president-CEO.
In 2017, his noncompete agreement with Invesco over, he and Southard bought legacy company Innovator Capital Management to create and market ETFs. Current total AUM: more than $1 billion.
Last August they introduced the Defined Outcome ETFs, a suite of risk-management focused funds that provides buffers to market losses. Thus far, the funds have about $458 million in assets.
The first of their kind, Bond says, the new ETFs allow advisors to better align equity exposure to clients’ risk tolerance level.
In the interview, Bond, 54, forecasts growth in value-oriented ETFs, such as smart beta, and declares ETFs often “a stabilizing factor in the marketplace” and “the way most people will invest for the foreseeable future.”
The first-ever ETFs ever were based on benchmark indexes only. Bond and Southard — whom Bond describes as “a quant” — took the ETF concept further when they created “intelligent indexes” and funds based not just on size or style but on a value proposition. That triggered a parade of new indexes and ETFs, marking the start of smart beta indexing and factor indexing.
ThinkAdvisor recently interviewed Bond, on the phone from his office in Wheaton, Illinois. His early background includes stints at First Trust and Nuveen, where he worked with a broad range of financial products, from unit trusts to closed-end funds to hedge funds. Upon the ETF’s debut, the fund’s fundamental structure flashed huge potential, he says.
In our chat, he weighs in on fee wars and other ETF issues.
Here are excerpts:
THINKADVISOR: What’s upcoming in ETF World?
BRUCE BOND: The benchmark ETFs will continue to get the assets; but you can expect to see continued growth in some of the active value-added sectors, such as smart beta, factor investing, hedged-type equities.
What makes your outlook so rosy?
The ETF structure is far superior to many others because there are significant benefits that can be delivered through it. As long as that remains the case, I see more and more assets moving toward that sector. One of the great things about an ETF is tax benefits. ETFs will continue to be the way most people will invest for the foreseeable future.
Some industry observers blame the big 2010 flash crash on ETFs. Your thoughts?
I don’t think that’s true. Any time there’s a major market disruption, everybody looks at ETFs like, maybe, they had something to do with it. In many cases, ETFs are actually a stabilizing factor in the marketplace.
Do you expect ETF fees to go any lower?
At a certain point, fees are irrelevant. We’re basically at the bottom. I don’t know how much lower they can go. We may see fees across the board continue to compress a little; but at some point, we’ll hit an equilibrium where people aren’t as concerned about fees as long as they’re getting proper value.
Why do you expect value-oriented ETF strategies to grow?
I see opportunity there. When ETFs originally came to market, they rode on benchmark investing. Now that the ETF structure itself has become mainstream, you’ll see more and more value-oriented strategies offered and more assets moving toward those segments.
What do you think of non-transparent ETFs?