As we saw in Part 1 of this series, ETFs have been very popular. Understanding the trends in this area is helpful in being able to select ETFs in the right way and for the right purposes. This second part of the series will continue the discussion to understand ETFs in greater detail so that investors can make better choices. One of the important predicted changes is that institutional investors are likely to become more diverse. This will be seen on a global scale.
Active ETFs are one area that many industry pundits believe will be the way of the future. As outlined by PWC (2013):
“After a slow start, active ETFs are picking up steam and are likely to become major drivers of a wider range of uses and greater share of wallet across a more diverse client base.”
It is believed that this will create challenges in a range of areas, such as in the need for innovative approaches to the regulations associated with portfolio transparency. This has held back active ETFs until now. Additionally, it is not believed that everyone will benefit from active ETFs, and there is unlikely to be a broad based move away from so-called “style box investing”.
ETFs’ pros and cons
It is thought that ETFs are going to continue to experience some issues as they grow and develop. Some of the problems that have been outlined include performance tracking problems, trade settlement and liquidity. Regulatory challenges, operational risks and poor technical understanding are also likely to hold back demand in some areas. Nonetheless, overall it is anticipated that ETFs are going to have a critical role in the asset management industry in the medium term. It is considered by PWC to be unlikely that ETFs will experience a slowing up of growth or even a reduction in growth in the short to medium term, as they are still very popular. Other changes in this area are likely to include increased customisation.
Looking at the changes to ETFs from a different perspective, Wall Street Journal (2013) asked experts in this area what they think. Like PWC, the Wall Street Journal documents the increased likelihood of actively managed funds. While to date these have not done particularly well in attracting investment, it seems that this is likely to change in the future. Other projections for this industry include an increase in competition in this area. Some worry that ETFs may be too popular, and that there is too much chopping them around. It is thought that as a result of this there is potential for some consolidation in this market. There were worries among some of the experts that there could be an increased likelihood of failure of new ETFs produced. The problem is perceived to be that while some of the products have big names behind them and will be able to achieve critical mass, others definitely do not, and these may struggle to attract investment. Some believe that these funds will start looking quite a bit more like managed funds in the future.
It seems that ETFs are here to stay and their popularity continues to increase. This means that an ETF strategy is a useful component in any investment approach. The strategy used needs to consider the increased number of ETFs worldwide. It is suggested that there are several approaches to make money from expertise with ETFs. One of the suggestions is creating opportunistic products that are based around marketplace events. A second is looking at them as the base for packaged solutions, for annuities or allocation funds. A third is to go down the actively managed route, taking outcome focused strategies that use ETFs. Another final option is looking back and creating products that are old in an ETF format instead. In doing this the asset manager needs to understand the ETF system and the opportunities faced. This means also being able to see how distribution platforms and databases can be used. It also involves looking at the ways that investors can be educated so that people understand what ETFs are and the value that they bring to the table. Differentiating is considered to be particularly important in attracting attention.