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The Maturity of the ETF Market

The Maturity of the ETF Market

Last week’s Inside ETF conference showed the maturity of the industry. Most participants were focused on educating advisors on building portfolios with the funds, not pushing specific products.

I was lucky enough to attend last week’s Inside ETF Conference, entitled “Portfolio Management Strategies for your Clients” and hosted by Index Universe.

It was one of the most business intense conferences I have attended. The conference was held in Fort Lauderdale, where, we were told, it was sunny and warm. The only rays we saw came from the florescent light bulbs in the conference center. Close to 2000 participants were there—the majority of them FAs. The focus was all about ETF education.

It still fascinates me that after years of attending ETF conferences, education remains the dominant issue.
This industry runs on innovation, especially around product development, but yet cannot seem to find the proper solution to educate the financial community and investors en masse. It was noted at the conference that only 3% of households in the U.S. own an ETF. That statistic alone tells you about the need to raise awareness.

Currently if you want to learn more about ETFs you have to resort to a handful of websites, including those of the various ETF sponsors, to get any information. In other words, the advisor has to pull the information when it should be pushed towards him in a comprehensive manner. With all the digital tools at our disposal, one hopes that innovation will move beyond product creation and change how we educate the world about the funds themselves.

There were some in attendance who expect to see ETFs over take Mutual Funds in assets. That still appears to be unrealistic. There are just about $2 Trillion in ETFs and over $12 Trillion in Mutual Funds. It would take at least a generation to shift that balance. ETFs would also need to be put into more workplace retirement plans. This, or course, is the Holy Grail for the industry. It has been difficult for ETFs to get access but the issuers are now seeing that the demand is coming from participants in retirement plans, not the industry, and that may be the game changer.

John Spense in ETF Trends points out there has been $1 Billion a day put into the funds so far in 2013. He noted the seasonality of the inflows and that they are not likely to be sustainable, but the rate clearly highlights their increased use. The Inside ETF Conference’s mission was to help advisors discover how to use the various types of funds to construct a portfolio. A number of speakers emphasized the fact that ETFs were being used to execute active strategies and clearly spoke about the need for both active and passive strategies. The point being made was that the utility of the ETF structure can provide access to certain asset classes and investment themes in a more efficient manner than traditional active management. But by no means were ETFs a single solution for all portfolios.

There are tools out there today to help advisors evaluate ETFs before they make an investment. Index Universe has created a database that provides advisors with institutional level research to help maneuver the growing complexity and diversity of the products. There are other services, some offered by online brokers, independent firms like XTF ( and Morningstar.
Actively-managed ETFs were a hot topic as well. The question is whether or not there is any substance to the hype. Some attendees questioned the need for an active solution inside an ETF since the concept of an ETF was to move away from the active manager. However, proponents of actively managed ETFs noted the structure was a better delivery vehicle for specific asset classes, for instance, in fixed income. Some industry heavyweights suggested that fixed-income ETFs may in fact alter the market for fixed income. Imagine the day when large institutions and governments bought ETFs, favoring the price transparency over buying bonds in today’s opaque dealer market.  

The ETF industry is clearly maturing. The focus of the conference was more about education than sales. Kudos to the industry for understanding that growth runs through a more educated advisor/investor. There are multiple ways to use ETFs in portfolio construction and understanding exactly what is inside the ETF and how it works is the key for advisors to bring the best results possible to their clients. However, an industry built on innovation needs to find a solution to reach more than just several hundred conference attendees at a time.

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