By Christian Magoon
CEO, Magoon Capital
The opening ceremonies for the Olympics this past week took viewers on a journey through the history of the United Kingdom. The program began by highlighting the UK's agrarian roots, literally transformed into a memorable display of its massive industrialization and then showcased the current digital age. As I watched the spectacle unfold, my thoughts turned to the parallels of the ETF industry and its evolution in the United States. It too has gone through several major transformations - but in just less than 20 years. While these transformations have been evolutionary, each has delivered unique value to the investment world.
TRADITIONAL INDEXING ROOTS
If the United Kingdom's roots are tied to farming, the ETF parallel is the traditional broad based index ETF. Designed primarily for those who wanted access to broad baskets of stocks, ETFs like SPY, IVV, DIA and QQQ are prime examples. These ETFs delivered efficient and liquid access to well known indexes without the need to enter the futures market. Today with over $190 billion of combined assets in the funds, investors and traders rely on them as core equity portfolio building blocks. Consequently these ETFs make up a material portion of the foundation of what the ETF industry has become today. Here is a detailed grid from Index Universe displaying the four funds' asset size, pricing and inception date.
INDUSTRIALIZATION OF ETFS
Just as the United Kingdom was transformed by the new technology and ideas of industrialization, so was the ETF industry. The success of the broad based index ETF attracted new thinking within the industry which brought forth expanded ideas in terms of structure, indexing and scale. Products like the SPDR Gold Trust (GLD) emerged out of a revolutionary underlying ETF structure that allowed the fund to own previously forbidden investments - those not considered securities. In GLD's case, it unlocked access to bars of gold.
New ETFs were launched designed to track indexes that were built to capture the performance of investment strategies, not simply broad based market exposure. Funds from PowerShares including PWO and PWC are great representations of this trend.
Finally the ETF industry began to scale in industrial proportions as the amount of products and Sponsors increased along side assets and public awareness. This led to varied outcomes including lower expense ratios for a variety of core ETFs but also an increase in ETFs that closed due to lack of assets.
DIGITAL AGE OF ETFS
The digital age is a hyper responsive time period with possibilities that are endless. Characteristics like flexibility, efficiency and convenience are greatly valued in the digital age. In this time period ETFs have truly flourished as they have become better alternatives to the traditional products investors have relied on. The flexibility provided through the liquidity and access of the ETF structure shines brightly today. At the same time, cost and tax efficiency appear to be "must haves" for investors concerned about potential lower market returns and higher taxes going forward. Finally in a world where almost every song or television show ever produced is available with a few keystrokes, the convenience of buying or selling an ETF accessing virtually any market segment is compelling.
ETFs, like the United Kingdom and the world, continue to evolve at a growing pace. While this growth brings with it many positive developments, new challenges will emerge. To some these challenges may seem overwhelming, but to others these challenges are a small price to pay for the new features and benefits progress introduces to the world.