The exchange traded fund universe is still expanding. However, the pace at which the industry grows will hinge on product evolution beyond the traditional beta-indexing structures, greater acceptance among advisors and the growth of model portfolios, according to a Guggenheim Investments exec.
The global ETP industry, which includes ETFs and exchange traded notes, has gathered over $1.76 trillion in assets under management, and Cerulli Associates calculates that global assets could exceed $3.5 trillion over the next five years, writes Tony Davidow, managing director, portfolio strategist and head of ETF Knowledge Center at Guggenheim, for AdvisorOne. But the industry will have to adapt and engineer new products and ideas to stay competitive.
“First and foremost, I believe that there will be continued product innovation,” Davidow said.
For example, the first ETFs were structured to cheaply mimic broad market indices, then came the growing number of niche or specialized ETF products that provided access to specific segments of the market.
Davidow believes that as advisors demand finer slices of the capital markets, more providers will create ETF tools to access the inefficient markets or asset classes. Alternatively, advisors are also seeking better beta tools, and fund sponsors are responding with alternative weighting styles to traditional market-cap methodologies, like equal-weight and fundamentally weighted strategies. [Shift to Fee-Based Advisors Supports ETFs]
On the fixed-income side, bond investors may now access investment grade, municipal, high yield, short-duration, aggregate and emerging market bond securities through ETFs. In addition, bond ETF investors can choose among defined-maturity ETFs to better control duration risk in their fixed-income portfolios.
As the number of registered investment advisors grows, many have increased allocations to ETFs as an easy and cost-effective way to invest in any market segment.
More recently, the investment industry has created ETF model portfolios that offer clearly defined investment disciplines. Morningstar currently tracks over 490 strategies from 120 firms with about $50 billion in assets under management as of June 2012. Since September 2011 through June 2012, the number of strategies in the market has grown 48%.[Fee-Based Advisors Driving Growth of ETF Managed Portfolios]
“I believe that the growth in Model Builders will accelerate as firms develop their track records, and focus on promoting their strategies,” Davidow said.
“I believe that ETFs will continue to evolve and grow over time,” Davidow added. “Growth will likely come from product innovation, broader acceptance from advisors, and the growth of model builders. How large and how fast the growth will be is debatable.”
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Max Chen contributed to this article.