The Impact

ETF investing will only get more complex. With new products hitting the market daily, the tools introduced when the industry was at its infancy haven’t kept pace. New, more sophisticated analytical tools will make it easier for portfolio managers to ‘test drive’ prospective positions before they commit.

Not only can they better judge the effect new holdings will have in a variety of market conditions, they’ll also be able to gauge the cost efficiency of individual holdings. That, in turn, will make it possible to use ETFs more effectively as overall portfolio hedges or even as a counterbalance against other positions. Going forward, analytical tools will become increasingly important as a way to see how the expense ratios of actively managed funds measure up against more passive index-tracking ETFs over time. Portfolio managers will also get a better idea of how well a holding stays true to its investment mandate in up and down markets.

Ultimately, keener analysis will make it possible for investors to better understand both active and passive portfolios. That, in turn, will help advisors feel a greater confidence about a broader range of investments. And greater knowledge in the hands of more will help draw more money and more participants into a burgeoning ETF market.

Peter Zangari is Managing Director and Head of MSCI’s Equity Portfolio Management Analytics business.