It’s a challenge, but a good challenge. Which of four trends that are powering the exchange-traded fund industry is going to be the most powerful?
Trend trackers: panellists discuss the areas with the greatest potential. (From left to right) Rachel Lord, Isabelle Bourcier, Fannie Wurtz, Deborah Yang and Sau Kwan
That was the question facing a big-name panel at the ninth annual Inside ETFs conference in Amsterdam on June 14. It’s a sign of the industry’s almost boundless potential for growth beyond its current global $ 3.1 trillion that the speakers struggled to agree on which factor was going to be most beneficial.
The first force that could produce a surge in assets is robo-advice – systems that could analyse retail clients’ savings needs and risk profiles and generate custom portfolios built out of ETFs. Already being offered by startups such as Nutmeg, there’s potential for a real lift-off if big banks or asset managers wade in. Panel moderator Deborah Fuhr, managing director and founder of ETFGI, asked the leaders how they saw the latest disruptor to the finance industry working for ETFs.
Rachel Lord, head of Emea for BlackRock’s iShares, the biggest ETF provider in the region, said: “Robo-advice will fill a gap and we think it is a good thing. Using scale and technology, it will reduce the cost of advice for clients.”
Isabelle Bourcier, global head of ETF and index solutions at BNP Paribas, said: “I am a strong believer in robo-advice. It is a good way to access investment options. When I see how retail investors are served at the moment, it’s a pity. For many of them, robo is the only way they can access advice.”
Bourcier said robo-advisers were another distribution platform for ETFs that would help drive products, which had traditionally been the domain of the institutional market, towards retail customers.
However, Fuhr asked the panel if they were concerned that customers would not trust computers with their financial health.
Lord said: “If people do not completely trust a computer, it is probably a good thing. I think we will end up with a hybrid model based on an algorithm for asset allocation, but customers will still want to speak to someone they can trust.”
Away from retail investment, Fannie Wurtz, managing director in indexing and smart beta at Amundi, said ETF providers had a challenge to get existing institutional investors to adapt how they used these vehicles – another area of growth potential.
Wurtz said: “Some 70% of 200 institutional investors in Europe use ETFs, we need to work with them to change some of the tools they currently use and replace them with ETFs.”
Wurtz said these investors had traditionally purely invested in equities and bonds through these index-based products, whereas there was a growing argument for them to swap out some of their derivatives and hedging tools – such as futures – and replace them with ETFs. She added that some had already started to switch.
Product innovation would be key to accessing new areas of an existing client’s portfolio – as well as attracting new ones – the panel agreed, and with active managers’ performance often falling below expectations, the time is right to pounce.
Smart beta – creating products that are based on non-standard indices that aim to outperform because of market inefficienies – has become the hot sector for ETF innovation, with “phenomenal” inflows, according to Deborah Yang, managing director and head of index, Emea, at MSCI. She said: “Some $ 11 billion has flowed into smart beta ETFs, year to date, and the approach has been outperforming.”
Fuhr said some $ 400 billion was invested through smart beta ETFs globally. The first of these products was launched 14 years ago in the US, with Europe following suit in 2011 through a launch by provider Ossiam, for which Bourcier worked at the time.
Yang said: “It has given every investor the choice and access to a tool that was a staple for active managers.”
Lord at BlackRock’s iShares, which appointed Andrew Ang, professor of business at Columbia Business School, to lead its smart beta strategy in 2015, said it was a “better way of asset management and the way of the future”.
Wurtz at Amundi said despite flows out of some strategies, smart beta ETFs had retained more investor assets than others. Certainly, there were more conference sessions dedicated to the topic than any other strategy.
Another growing theme for ETF providers to engage with was investing according to environmental, social and corporate governance guidelines, according to the panel.
Yang at MSCI said this type of investing had traditionally turned off most investors as it had involved mainly negative screening – a simple business of screening out stocks that failed to meet guidelines – but the approach had become more attractive as they had realised there were more options available. By using an ETF, investors can see exactly what they hold and are able to set specific rules based on their own views.
Yang said: “Investors have realised that an ESG approach doesn’t hurt returns and can actually raise alpha. There is evidence that it has outperformed regular investment approaches, which means your investments can be value and financially driven.”
Bourcier at BNP Paribas said: “It’s a long-term trend. Institutional investors are buying these products, which helps the market to progress.”
Finally, Sau Kwan, president at E Fund Management, the third largest investment house in China, explained the importance of the Chinese pension market to ETF providers searching for new assets.
Kwan said: “In its 11-year history, the Chinese ETF sector has gathered $ 73 billion in 131 products. These assets are mainly in equities and some fixed income products – we have a long way to go in development.”
China offers huge growth potential, however, following the reform of its pillar-one pension system.
Kwan said: “Pillar-one pensions can only invest in bank deposits or government debt, but this is changing. They will be allowed to equities and ETFs. If even just 10% of the billions made available head to ETFs, it will be a huge thing. We have been waiting a long time for pensions to be able to invest in A-shares and now ETFs. It will improve the overall market.”
She said that some western ETF providers had already partnered with Chinese companies to provide each market with access to the other, and predicted this would continue. However, Kwan said the Chinese market was dominated by three large players, who had a 60% market share.
She said: “Newcomers need to come to China with new products to attract assets.”