Industry leaders discuss the growth of ETF assets and their expectations for future innovation in the ETF space. This is Part Five of our ETF Masterclass Special Report.

From the first ETF that launched in the U.S. in 1994, to the more than 2,000 ETFs available for the choosing in 2019, and all those that have come and gone in between, this once-seemingly niche product has radically redefined wealth management.

Gone are the days when a mutual fund was the sole trusted investment mechanism on the mainstream stage. Similarly, the formerly-unique capabilities of hedge funds are increasingly being replicated in liquid alternatives. As flows into these strategies have declined, ETFs have thrived, disrupting the industry with low-cost options that imitate and adapt accordingly.

As ETFs head into 30 years since their initial Canadian launch, we asked some of the top minds in the ETF space to sound off on the future. We asked them about their expectations for future innovation, where there is still room to grow, and what potential changes should be top of mind for advisors. While no one can predict the future, it goes without saying that ETFs will be there.

Rich Powers, head of ETF product management, Vanguard: “A stat that we’ve seen in different surveys is that only about 20% of advisors' portfolios are in ETFs today. So a lot of their investments are either in mutual funds, insurance products, or individual securities. So, you can extrapolate into the future that as more advisors get comfortable, and see the benefits of ETFs, that more of the portfolios they run through their clients will be populated by ETFs.

Patrick Sweeny, founding partner, Symmetry Partners: “We should expect the race to zero to continue. Fees will continue to drop and that’s good for consumers, but it’s not always the best solution. To use what is simply the cheapest is a good place to start. I believe in low-cost investing myself. However, you want to be wary of gimmicky offerings. So that will continue, [and] you’re going to have to be aware of the tax implications of our industry.”

“Investors learned that they have to be the smart ones. The products aren't smart, they're just tools. And it's important for the investor who is buying a smart beta product to know which tool to use.”
Janet Johnston

Linda Zhang, CEO and founder, Purview Investments: “In terms of the overall ETF business growth, we have already experienced phenomenal asset flow into ETFs. Globally, what is it, $5 trillion already? I think domestically, and globally, this trend will continue. And largely at the expense of the net outflows of mutual funds. [Regarding m]illennials, I think the generation understands ETFs very quickly, and they [are] comfortable investing in them.”

Janet Johnston, portfolio manager, TrimTabs Asset Management: “We’re going to continue to see more blending of true active management with multi-factor models. Smart beta hasn’t been a cure-all for investors. Investors learned that they have to be the smart ones. The products aren’t smart, they’re just tools. And it’s important for the investor who is buying a smart beta product to know which tool to use.”

Powers: “Active remains notably absent in terms of ETF products and usage, and we certainly have active firms involved in offering active mutual funds who are highly interested in distributing their products through ETFs. We’ve seen some regulatory changes that might facilitate that. So, it could be a situation where we see more active ETFs become available, or active strategies available in the ETF wrapper. Whether they actually grow to be something sizable, I think will ultimately be decided by the price that those products are offered at. Going back to this idea of the less you charge, the higher the probability you are going to reach your outcome -- if the results aren’t there for those active strategies, client interest is likely not to be there either.”

Johnston: “I also think the mutual fund industry, which has been losing market share to ETFs, mainly because ETFs are better structured, is looking add products in the ETF environment. And one of the ways that they’re looking to do that is through semi-transparent products. I think the jury is still out in terms of the success of these products. The investing community will be watching it closely. Historically, the semi-transparent products haven’t been that successful. I think that big firms are testing the water and it’ll be interesting to see if these products actually take off.”

Elisabeth Kashner, Factset
Elisabeth Kashner, director of ETF research and analytics, Factset: “I’m excited to see where financial innovation takes all of us, whether it’s something that handles tax situations even better, or solutions that help solve problems that had previously been really difficult to solve, like increased volatility of a bond fund as compared to a single bond, or accessing something like certificates of deposit in an ETF wrapper, or being able to put in behavioral measures that will help solve some of our retirement savings gap.”