The exchange traded fund landscape is changing. We are no longer in the first inning, but rather in the middle stages of the industry’s growth.
On a recent Ignites webcast, myself and Shundrawn Thomas, managing director and global head of ETFs at Northern Trust, the provider behind the FlexShares suite, looked at how providers are either prospering or fading in the ETF arena.
With the land grab for beta indexing strategies already over, ETF providers will have to engineer creative strategies to help differentiate themselves from the well-established firms.
PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV), for instance, has garnered almost $2.5 billion since launching in May 2011 as investors jumped at the opportunity to invest in a basket of stocks that have exhibited smaller price swings. Investors are putting a premium on safety after being burned twice in the past 12 years by the dot-com bust and subprime meltdown.
“Product development is the single greatest factor of success,” Thomas said in the webcast.
Specifically, Thomas believes that we are moving toward innovation in enhanced indices, fundamental weighting and actively managed products as a way to create an “expanded array of investment strategies.” In addition, sponsors are leveraging brand names to create competitive advantages.
For example, the PIMCO Total Return ETF (NYSEArca: BOND) provides the average investor exposure to the investment strategy behind Bill Gross’s flagship Total Return fund. Since it began trading in March, the ETF has attracted almost $2.8 billion in assets. [Bill Gross Touts PIMCO Total Return ETF’s Active Approach]
With the greater use of ETFs amongst independent advisors, Thomas expects ETFs to continue to attract assets, even at the expense of other investment products. For instance, $1.5 trillion has come out of equity mutual funds since 2008, and the ETF growth story has in part benefited from the exodus from active mutual funds. Additionally, some investors are using sector ETFs rather than trading individual stocks.
Moreover, increased competition, especially among the large ETF providers, has helped drive down costs – Schwab is winning the ETF price war after recently announcing the ultra low expense ratio of 0.04% on some of its ETFs. [ETF Fee Cuts: Almost a ‘Free Lunch’]
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.