Exchange traded funds have enjoyed phenomenal growth in recent years, with U.S.-listed ETFs accumulating $3.5 trillion in assets under management after another record year of inflows, and the pace of asset growth does not appear to be slowing any time soon.
“We are headed for a period where there will be increased volatility for risk assets. When we see a period like that, we see ETFs benefit afterward,” Guggenheim’s William Belden told Wealth Management.
Belden argued that investors have been attracted to ETF’s attractive characteristics, such as their efficiency, transparency and flexibility. ETFs are easy to use, tax efficient and low cost. They are transparent in nature, so investors know what they are buying into. ETFs also enable investors to buy and sell the investment vehicle like a stock during normal hours.
However, nothing is without risks. Belden pointed out that ETFs may focus on narrowly defined or niche market segments, which may expose investors to greater risks associated with the targeted investments. Furthermore, overly active trading or not know what one is exposed to can weigh on an investment portfolio.
“Buyer beware is appropriate for any investor who goes into ETFs,” Belden said.
Some critics are concerned that given the size of ETFs, large outflows, especially during periods of market volatility, could exacerbate declines. Belden, though, wants to dispel those myths, arguing that ETFs won’t likely drive markets by themselves. Investors, though, should watch out for areas where liquidity is tighter, such as high yield, bank loans, emerging market bonds or small-cap foreign stocks.
“But I don’t think that the impact will be that great. Despite the meteoric growth of ETFs, they are still a small percentage of market-cap,” Belden said.
Looking ahead, Belden is excited with the progress the ETF industry is going through. For example, there is discussion that the Securities and Exchange Commission will make it easier to launch ETFs in the future, which could engender greater competition and invite innovation, ultimately benefiting investors.
Additionally, more active managers are also eyeing the ETF space to capitalize on the growth in ETFs and bring time-tested investment strategies to market in the ETF space.
For more information on the ETF industry, visit our ETF performance reports category.