Inside ETFs, the largest and most prestigious gathering of the ETF industry just concluded this week in sunny Florida. This conference is akin to the Super Bowl as it gathers the best and brightest creators and users of ETFs for several days of discussion about all things ETF. As a participant since the event’s inception, I’ve found it to be a great barometer on industry trends. Let me share a few observations I gleaned from 2014’s event.
ETFs Grow Up
The ETF industry is becoming more mainstream as investors increasingly turn to ETFs for their efficiency, transparency and flexibility. This has led to both positives and negatives for the ETF industry. Many formerly independent ETF Sponsors are now controlled by large asset managers as interested in selling mutual funds as ETFs. Indeed some even were marketing mutual funds, unit trusts and other investment products at their “ETF” booths. This trend is a clear tip of the hat to the popularity of ETFs, as they become a door opener used by more traditional fund companies.
On the flip side several newer ETF Sponsors are well-capitalized divisions of large financial companies but have been given the freedom to promote ETFs on a grand scale. For example one brilliant ETF Sponsor set up a massive booth with golf pros and cameras to analyze conference attendee’s golf swings. Those waiting in line for their turn could check out literature on various ETFs in the Sponsor’s lineup. Finally, in a clear sign of the emergence of ETFs in the retail world, the organizer of the Inside ETFs conference announced a change to its corporate name from Index Universe to ETFs.com. This was presumably done to become more accessible to the flood of new retail investors hungry for ETF information.
Good Versus Evil
The ETF industry is increasingly divided into legacy ETF supporters who believe solely in index investing versus those that believe indexing is not always the best way to invest. With actively managed ETFs beginning to gain traction (See BOND, MINT, ELD, SRLN), the tension is growing between the two groups. The most recent dust up is centered on so-called “smart beta” ETFs, which generally track indexes that emphasize certain factors when selecting securities. Traditional indexers are skeptical of the merit of these alternative index methodologies while many in the active camp see them as combining the benefits of indexing and active management. Several conference sessions contained spirited debate on this issue, which will only intensify given the ascendant nature of active ETFs.
I often say that the only investment segment in asset management growing faster than ETFs is the business assembling prepackaged portfolios of ETFs. ETF Strategists put together mixes of ETFs based on everything from risk profiles to specific investment objectives. These firms have been growing their assets at a blistering pace and are increasingly becoming a big player in ETF flows. Their one-stop approach to ETF investing is attractive to many investors and financial advisors who may not have the technical expertise in ETFs. ETF Sponsors see this growing market segment as a key driver of their future flows – especially in the market-share war that is taking place in broad based ETFs. Perhaps that’s why a variety of ETF Sponsors were eager to share information and literature on ETF Strategists incorporating their products into a model portfolio. This is a trend to keep an eye on as one wonders if Strategist/Sponsor alliances will begin to form.
This year’s Inside ETFs conference left me feeling that the forecast for ETFs appears to be quite sunny. The attendance at the conference was a robust mix of new and old asset management firms and financial advisors. ETF Sponsors were privately talking about a healthy pipeline of new strategies coming to the ETF marketplace in 2014. Perhaps topping it all off was conference host ETF.com when it forecasted a $15 trillion ETF industry in 10 years, up from $1.7 trillion today. Although permanent blue skies for any industry aren’t likely, the ETF industry emerged from its 2014 Super Bowl with what appears to be many sunny days ahead.