The introduction of exchange-traded funds carved out its own niche in the financial sector, which in turn, grew exponentially and with that rise in ETFs, industry changes are abound. Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange, is all too familiar with these market trends in ETFs.
Whether as a standalone investment product or a complement to an existing portfolio, Yones witnesses firsthand how investors utilize these products. Furthermore, he’s keen on where the industry is currently and where it’s headed.
Utilizing ETFs in a Portfolio
Once financial advisors arm investors with the necessary knowledge regarding ETFs, it is now up to them to identify way on how to incorporate them into an existing portfolio as complimentary products or as hedges against current investment strategies.
“People are using ETFs in a lot of different ways—both as investment vehicles, but also as trading vehicles,” said Yones in his latest In The Know segment filmed at the NYSE. “They can express changes in the thoughts of the overall market, maybe make a small adjustment to their portfolio and they’re doing simply, easily with ETFs.”
Because of their adaptability as an investment product, ETFs have experienced exponential growth with respect to capital flows. With over $120 billion in assets flowing in, that growth is expected to only continue as more ETFs enter the marketplace.
“It’s been a great year on net cash flow for anyone who’s launching ETFs or has a business where they’re generating assets as well as on the trading side,” said Yones.
The adoption of ETFs for various uses has spurred areas of growth where investors are now able to corner certain aspects of the capital markets that where not readily available before. One of those is the fixed-income space where investors can obtain bond exposure and diversification without having to invest directly in the debt itself, almost creating a new class of bond investors that can thrive in various economic scenarios.
“It’s these fixed-income ETFs that continue to be launched with new ways to access that market wrapped in an ETF wrapper,” said Yones.
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With the increased investor interest in fixed-income, Yones is seeing a variety of strategies implemented to capitalize on the bond market. As opposed to broad exposure in the bond market, ETFs are now available for specific areas of debt, hedging strategies and other products as the push for innovation in the ETF space continues.
“What we’re seeing in not just sort of those broad-based products that have come out in the past,” said Yones. “Now we’re seeing rules-based–some people call them smart beta or factor. We’re seeing a lot of actively-managed ETFs in the fixed-income space.”
Industry Changes on the Horizon
With ETFs growing at a rampant pace, innovation has been a byproduct and companies are finding new ways to accommodate the growth in this space, especially from a regulatory standpoint.
“In my 20 years in the ETF industry, I can’t really think of a more dynamic regulatory environment than right now,” said Yones.
At the New York Stock Exchange, the focus is on more transparency and expediency, such as the publishing of closing prices. The NYSE is using mathematical algorithms so that investor and issuers know the exact price of an ETF at a specific time.
“We began a whole new process where now at the New York Stock Exchange, if your ETF is listed here, we run this great calculation where we take the mid-point of the bid and the offer,” said Yones. “It’s somewhat scientific, but it’s a smarter way to value these ETFs.”
Yones cites specific areas of the market that ETFs are trending towards, such as artificial intelligence, robotics and other disruptive innovations that are in the forefront of what could be a vastly different ETF scenario than in days past.
“Those are all new categories of investing that maybe don’t fit into a pure technology ETF where now you can capture the growth of those companies in a brand new ETF,” said Yones.