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Down But Not Out: Vanguard Says Trump Rules Cull Won’t Hurt ETFs

ETFs are poised to more than triple assets under management as a result of the Department of Labor's fiduciary rule.

By Rachel Evans

(Bloomberg) --Money managers including Vanguard Group Inc. and State Street Corp. are remaining stoical amid speculation that President-elect Donald Trump is planning to scrap a new rule that had been expected to channel trillions of dollars into their funds.

Exchange-traded funds were poised to more than triple assets under management over the next five years in part thanks to a Department of Labor regulation that requires financial advisers to prioritize their clients’ interests when recommending retirement investments, according to a September report from Bank of New York Mellon Corp. However, the rules, which were due to take effect in April, have publicly drawn the ire of Trump adviser Anthony Scaramucci, founder of investment firm SkyBridge Capital, casting doubt on their future.

Exchange-traded products, which currently house about $2.4 trillion of capital for everyone from mom-and-pop investors to sophisticated hedge funds, will continue to boom thanks to their low cost, according to Rich Powers, the head of ETF product management at Malvern, Pennsylvania-based Vanguard, one of the biggest providers of the funds. State Street’s Dave Mazza, the New York-based head of exchange-traded and mutual fund research, agrees, but says the industry may need to curb its growth expectations.

The rules “would be a tailwind, but investors have come to realize that cost is the one thing they can control,” said Powers. “There’s no reason in our mind that the trajectory of ETF adoption will slow in the near term given the forces at play around a low return environment and a greater focus on cost, regardless of the regulatory requirements.”

Dismantling Regulations

Scaramucci has compared the fiduciary rule to the infamous Dred Scott decision, a 1857 Supreme Court ruling that denied black Americans citizenship. Trump has meanwhile said he plans to dismantle the 2010 Dodd-Frank financial reform law, which helped spur investment and trading in ETFs in the wake of the financial crisis.

Morningstar Inc. said last week that the market is now likely to expand at the lower end of the 10-14 percent range it previously forecast.

State Street’s Mazza said getting rid of the rule “may cause people to ratchet down what may have been realistic or unrealistic expectations for what growth would have been under it.”

Cost is King

In the meantime, fund issuers are slashing costs to improve their competitive positions. BlackRock Inc., the world’s largest ETF provider, last month cut fees on 15 funds, with Mark Wiedman, the global head of its iShares ETF business, saying the asset manager was targeting volume as the Labor Department rule would put “trillions in motion over the next five years.”

Melissa Garville, a spokeswoman for the company, declined to comment on the impact of Trump’s win on these expectations.

A Trump administration could however have a positive impact on the ETF industry, encouraging more innovative products and broadening investors’ choice, according to Michael Sapir, chief executive of Bethesda, Maryland-based ProShare Advisors LLC, an ETF provider that specializes in leveraged and inverse products.

Scrapping the DOL rule “may make the short term acceleration of growth less than it otherwise would be,” Sapir said by phone. But “ETFs are here to stay,” he said. “That ship has sailed and there’s no turning back the growth and momentum toward ETFs.”
 
To contact the reporter on this story: Rachel Evans in New York at [email protected] To contact the editors responsible for this story: Nabila Ahmed at [email protected] Eric J. Weiner, Faris Khan

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