The ETF industry has grown by leaps and bounds in just a few short years. We feel that it’s worth taking a moment to reflect on its evolution, as well as its future, from the perspective of someone who’s played an integral part in its growth.
We recently had the chance to talk with Christian Magoon, a well-respected ETF expert with an admirable track record in the industry, about the future growth prospects of the exchange-traded universe.
ETF Database: You’re a true veteran in the ETF space — what do you see as the biggest driver of growth for the industry from the issuers perspective?
Christian Magoon (CM): I believe the ETF industry will continue to earn the business it deserves by educating investors on the features and benefits of the vehicle. The more investors are aware of the efficiency, transparency and flexibility of the ETF structure, the more the industry will grow.
ETFdb Now from the investors perspective — what do you expect in terms of ETF adoption going forward? What types of investors have been slow to adopt or are potentially major beneficiaries of embracing ETFs?
CM: I think educated investors are increasingly turning to ETFs as opposed to mutual funds despite the fact that mutual funds have been a default investment option for decades. Most investors value the efficiency and transparency ETFs offer versus mutual funds. For that reason I see continued marketshare growth for ETFs.
Investors that prefer active strategies are one of the slowest group to adopt ETFs because of a lack of product offerings. The ETF industry has been historically focused on indexing thereby
mostly ignoring active strategies. The good news for the active crowd is that over the last five years the ETF industry has accelerated non index based offerings. Still there are many active strategies to be built out and I believe a healthy market exists for them. One might take a look at the extreme growth of actively managed model ETF portfolios to get an idea of the demand for a more active ETF approach.
ETF Database: What are some of the trends you are seeing as far as what kinds of products are quick to gain momentum? Can exotic ETFs compete with “proven strategies” in the same space for assets?
CM: First, it is clear to me that the definition of what is “exotic” versus what is “proven” continually changes in the ETF world. This may be due to strong equity markets over the past five years or it could be that the bar for acceptance of new ideas has been lowered. Either way, new selection and weighting schemes applied to old market segments seem to be in vogue. I think that time will tell whether these more “exotic” approaches add the value investors expect.
ETF Database: What are some of the more exciting “under the radar” trends you’re noticing on the product development front?
CM: I think white label ETF platforms offer significant growth potential for the ETF industry. At their best, white label ETF platforms bring in new asset managers to the ETF industry that may not be able to do it all on their own. The challenge for these ETF platforms however will be to add value to the ETFs on their platform beyond being a simple service provider. The most successful white label ETF platforms will partner with their clients to build ETF awareness and assets under management. While those tasks are elementary to a traditional ETF provider, it is challenging for a white label platform.
The other interesting ETF developing trend is what I call “targeted conversions” of ETF provider assets within investment firms. Firms that are doing this either own significant amounts of other provider’s ETFs or have customers that own significant amounts of third party ETFs. Once those ownership pockets are identified the firm launches products to convert those third party ETF assets into their own ETF assets. Discount brokers, registered investment advisors and institutional money managers are examples of firms actively pursuing “targeted conversions."
ETF Database: There are some critics who think that ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?
CM: Yes, the ETF industry has gone well beyond offering broad-based exposure to buy-and-hold investors. For some, that path is offensive to their underlying investment ideology. For others, this evolution did not happen soon enough. My take is that a healthy ETF industry should offer many types of tools to the diverse user base that ETFs attract. Ultimately the markets will decide what ETF developments are valuable are which are not.
The Bottom Line
No matter how you might feel about adopting actively-managed, or more “exotic”, investment strategies, it’s clear that the exchange-traded product structure will continue to be embraced by more and more investors of all walk as the education gap slowly but surely shrinks.
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Disclosure: No positions at time of writing.