If you need proof that exchange-traded funds have become a global phenomenon, just look to Iran—yes, Iran—where 24 ETFs now trade locally on the Tehran Stock Exchange and the over-the-counter Iran Fara Bourse, with 22 being actively managed.
That, said Deborah Fuhr, managing partner and a founder of London-based exchange-traded product research house ETFGI, who spoke at an industry gathering in New York City on Wednesday, illustrates how ETFs are becoming go-to investment products around the world.
Fuhr delivered a state-of-the-industry report during the ETF Trading and Market Structure Conference hosted by ETFGI and Kreab, a global public relations firm.
For investors who follow such things, it’s clear that ETFs—the vast majority being passive, index-tracking vehicles—increasingly are gaining walletshare at the expense of actively managed mutual funds.
“As of the end of last month, we’ve had 40 [consecutive] months with net positive asset flows [into ETFs],” Fuhr said. “There is no other product that can say that. We have record assets in many countries. One of the reasons is that ETFs are the only democratic investment product where institutions, financial advisors and retail investors have access to the same toolbox at the same annual cost. Having worked at a brokerage firm for 11 years, that would be inconceivable that you would offer the same thing to everyone at the same annual cost.”
One of the more telling trends, according to Fuhr, is that ETFs are thumping hedge funds at their own game.
She noted that the first ETF was launched in Canada in March 1990, while the hedge fund industry is 67 years old. But in June 2015, assets in the ETF industry surpassed assets in the hedge fund industry, and at the end of this year’s first quarter assets in ETFs were $864 billion greater than the hedge fund industry.
“The reason is if you look at the asset-weighted performance of hedge funds in each of the past six years, it has been below the S&P 500,” Fuhr said. "So why pay 2 and 20 [the traditional fee- and performance-based compensation structure of hedge funds], with limited liquidity and transparency, when you can invest in something today that provides hedge fund replication strategies in a liquid, transparent cost-efficient wrapper.”
Fuhr also delved into the topic of smart beta, a fast growing, if somewhat nebulous genre of the ETF marketplace.
“There’s a lot of confusion about what constitutes smart beta products,” she said, noting that some people say it’s anything that’s not market cap-weighted, or that even putting a currency hedge on a market cap-weighted ETF turns it into a smart beta product.