During my 20 years in the financial services industry, I’ve been able to witness the rapid evolution of ETFs as these funds have increased in popularity and investors increasingly use them to express their views and position portfolios for shifting market conditions.
I had a chance to speak about this evolution when I flew to Chicago at the beginning of the summer to attend the Morningstar Investment Conference, where I spoke on a panel about ETFs.
With more than 20 years of history and more than $2 trillion in assets under management, it’s clear that ETFs have moved beyond their first phase of development. The panel I participated on with fellow industry leaders addressed ETFs 2.0: What’s next for the funds that are helping to reshape the industry?
While the panel discussion was wide-ranging, it centered on these four topics:
- Smart beta. Whether it’s called smart beta, advanced beta or strategic beta, our panel acknowledged that these funds, which can be described as a mix between active and passive investment strategies, are here to stay.Smart beta strategies are increasingly being used to complement active and index holdings. They combine the transparency, liquidity and flexibility of indexing with the ability to take an active view on which risk factors may outperform over time.
- Active use of passive building blocks. The past 30 years have witnessed changes in how financial advisors conduct business. While some are stock pickers and others work as mutual fund selectors, we have also seen more advisors are becoming asset allocators.In our experience, rather than creating portfolios to beat a benchmark, advisors are building portfolios for quantifiable outcomes tied to specific future cash flow needs, such as retirement.The panel agreed that ETFs may play a major role in how advisors build portfolios, and passive funds are being used as a replacement or a complement to active funds. Passive funds can allow advisors to embrace a flexible framework for portfolio construction that incorporates long-term strategic, core-satellite and more tactical investment solutions to meet the needs of investors across a wide spectrum of risk tolerances.