With ETF assets now poised to cross the $2 trillion mark in the U.S., industry experts gathered at the annual IMN global indexing and ETF conference in Scottsdale, Ariz., marveled at the rapid growth, innovation and market acceptance of exchange traded products in the last decade.
"The growth has been nothing short of amazing, at a 26% compounded annual growth rate over the last 10 years," says Dodd Kittsley, head of ETF strategy at Deutsche Asset & Wealth Management.
"And I think that's just a baseline. We're just at the beginning stages, driven by increased investor adoption and a broader investor base that are using ETFs in a bigger way, every single day."
According to London-based research firm ETFGI, ETFs reached a new record of $1.98 trillion in assets in the U.S. at the end of November. The market consists of 1,659 products, from 68 providers listed on three exchanges, the firm reports, with net new asset inflows into U.S. listed ETFs reaching $42.4 billion in November, beating a previous high of $41.2 billion set in July 2013.
"ETFs going through $2 trillion in the U.S. is an important milestone," says Deborah Fuhr, managing partner of ETFGI and the recipient of a lifetime achievement award at the conference. "Having covered them since 1997, I can say many people didn't expect them to be successful."
Bobby Brooks, national sales director at Invesco PowerShares, says an industry shift that provided a crucial boost to the adoption of ETFs is the transition of traditional financial advisors into the RIA space.
"In 1993 the SPDR was launched, but between 1993 and 2001, there was minimal growth," Brooks says. "Exchanges need volume. The hottest product then was mutual funds, and in particular Vanguard mutual funds. But what was missing was the financial advisor, because ETFs trade like a stock. Advisors get paid by a product, and ETFs don't pay the advisor.
"So what happened is in the early 2000s many financial advisors in retail began to transition their practices from commissions to fees, and as they did so, you saw explosive growth of ETFs in the RIA channel, which was pure fee-based. And as other channels became more fee-based, you saw further growth."
Kittsley says one of the factors that has attracted investors to ETFs is the products' variation and ability to meet investor needs.
This year alone, there have been over 190 new product launches to date, according to ETF tracking firm First Bridge. The offerings have varied from ETFs tracking cyber security firms to onshore China bonds.
"We've seen a lot of innovation in product," Kittsley says. "We've seen over $8 billion going to products that have been launched in the last 12 months, so we continue to see the ETF vehicle be a viable, efficient solution for investors at large throughout the U.S. and the globe."
Another factor pushing demand, says Kevin T. Carter, CEO of EMQQIndex, a newly launched index tracking e-commerce in emerging markets, is that ETFs have captured popular appeal.
"I don't know if there's any significance to the $2 trillion mark, but clearly something's going on," Carter says.
"As a sort of qualitative point of that, you now have individual investors going to their advisors and saying, 'I want to invest in ETFs,' without any discussion of stocks, bonds or international. So it's caught on to the point where the guy on Main Street knows, or at least thinks he knows, that he wants ETFs, even if he doesn't know what that means. But it's got a long way to go."
Fuhr says that ability to appeal to even the average consumer is one of the biggest strengths of ETFs. For instance, she says, investors have preferred investing in physical gold through exchange traded products, because as an individual it is hard to own gold bars the same way that a central bank does.
"Today, active managers see ETFs like futures and use them and many pension funds and sovereign wealth funds, endowments, pensions, hedge funds, and financial advisors are using ETFs, so they are a very democratic product that allows all types of investors access to the same toolbox, at the same annual cost, with a minimum investment size of one share," Fuhr says.
"It really shows the power of the wrapper and structure in aiding distribution. It helps to illustrate that it has been a good idea, and there has been growing acceptance around the world."
Deutsche's Kittsley expects that the next round of growth in the ETF market will come from increased use of existing products.
"There are some great, compelling solutions that have grown dramatically over the last 12 months," he says. "Currency hedges are a great example of that. Making the mainland China A shares market relevant, which previously was inaccessible. So I think you're going to continue to see more of that."
Brooks expects more innovation in the active ETF space. "There's a lot of work going on there, whether it be transparent or non-transparent active," he says. "And you'll see more innovation in the concept of smart beta, such as smart beta in different asset classes. You're seeing smart beta applications to commodities, to fixed-income. Right now the growth has been in equities, but we think smart beta is going to transform the other areas as well."
PowerShares was bought by Invesco in 2006, but the market has recently seen a series of product provider acquisitions by traditional players seeking access to the ETF market, such as New York Life Investment Management's Dec. 4 announcement that it would acquire Rye Brook, N.Y.,-based IndexIQ.
Brooks welcomes the competition, but adds that the ETF market is not like the traditional mutual fund market.
"There's still a lot of room for new entrants, but I think it's very difficult," he says. "You have to commit to it and you have to be patient through the process. It is an entirely different ecosystem. But there's a lot of hustling to establish a foothold right now. That just speaks to everyone's belief that there's a huge future for ETFs."
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