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Five Key Trends in the ETF Landscape


With about $1.3 trillion in assets, exchange traded funds have grown from obscurity to a household name. Nevertheless, the ETF universe is relatively young and will continue to expand.

As ETF providers find new ways to attractive investor interest, Ari I. Weinberg for the Wall Street Journal sees a couple of rising trends within the industry.

For instance, fixed-income ETFs only make up 18% of all U.S.-listed ETF assets, but the overall bond market is about three times the size of the equities market. Overall, ETFs account for 2.2% of global equity securities and 0.3% of the fixed-income markets. So, bond ETFs still have a lot of catching up to do. Recently, iShares came out with a report that predicted global fixed-income assets could hit $2 trillion over the next decade as narrower fixed-income, like target-maturity strategies, non-U.S. and corporate debt ETFs garner greater interest.

Considering the lackluster returns and higher fees of active managers failing to beat benchmarks, there is a rising interest for advisors and easy ETF solutions for portfolio management. For instance, Andrew Gogerty of Morningstar points out that “growth in the fee-based model is tilting portfolios toward lower-cost, broad-based investments,” which can be easily achieved with passively indexed ETFs.

There is $3.14 trillion in U.S. 401(k)s, but only 0.2% of the assets are in ETF products. However, with new fee disclosure rules, 401(k) observers believe that investors will now start to look for low-fee, index-based ETF options to replace costlier mutual funds. “ETFs are particularly helpful in areas of the market where good, cheap options aren’t available,” Michael Iachini, head of ETF research at Schwab, said in the article.

The industry is also changing the way it markets ETF products. For example, the NYSE and Nasdaq Stock Market are looking at ways to enhance trading in smaller ETFs by bringing market makers closer to ETF sponsors. The BATZ BZX Exchange is also providing incentives for market makers who quote ETF prices even if they aren’t trading as a way to update price quotes. Meanwhile, actively managed ETF sponsors is considering a new method of getting around the daily disclosure rule that would prevent frontrunning.

Lastly, the traditional beta indexing ETFs space is well saturated. Providers will have to branch out to create innovative fund strategies. Lee Kranefuss, who ran iShares from 1999 to 2010, believes that sponsors will be re-examining ETFs’ underlying indices and benchmarks over the next five years.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.