Tom Lydon, publisher of ETF Trends, has been managing client money for over two decades and is one of the foremost experts in the exchange traded products industry.
Tom recently sat down with Bankrate.com Washington Bureau Chief Mark Hamrick to discuss the evolution and advantages of ETFs, how advisors and investors are increasing usage of these products and what the future holds for ETFs.
“After managing money for a few decades and being a huge fan of mutual funds, we saw that ETFs were starting to gain popularity,” said Lydon. “Once you lift up the hood, you understand a few things. Number one, they’re transparent. They’re index-based for the most part. And because you don’t pay a manager, their fees are very low and they’re tax-efficient. We began in the early 2000s shifting client assets. In the mid-2000s we found ourselves wholly owning ETFs and we had to educate clients about what ETFs are about.”
Lydon also discussed with Hamrick the diversification advantages offered by ETFs and their increased popularity in client and self-directed portfolios. [Advisors Should Evaluate Clients’ ETF Needs]
“Five years ago I wouldn’t say so (that American were knowledgeable of ETFs), but today, investors have really latched on and gotten involved with their portfolios. Technology has helped considerably with providing more information and more access to research. It has been a perfect environment for ETFs and more and more investors have been utilizing ETFs to diversify portfolios,” said Lydon.
Lydon also highlighted the rise of smart beta or intelligent index ETFs. Last year, smart beta ETFs attracted $65.1 billion in new assets, nearly double the $34.2 billion hauled in by the group in 2012. There is mounting evidence to support the notion that the smart beta or intelligent indexing boom still has plenty of room to run. [Smart Beta ETF Boom Ongoing]
“Advanced beta strategies are playing a more influential role in some of the world’s largest portfolios. Forty-two percent of investors currently use advanced beta and another 24 percent plan to do so over the next three years,” according to a study by State Street Global Advisors, the second-largest U.S. ETF issuer.
“The next wave in the ETF space is moving away from the conventional indexes like the S&P 500,” added Lydon. “Many felt that active management in the ETF space was going to be the next huge evolution, but its actually smart beta that is picking up huge momentum. In an equal-weight or fundamental index, over time, these structures actually do well and, many times, better. It’s a consideration for investors, moving away from legacy indexes.”