The ETF market continues its penetration across asset classes beyond equities, its traditional area of activity: According to data from ETFGI, fixed income ETFs account for the largest proportion of net new assets for the second year running and now represent 20% of the market, while commodities ETFs grew 30% in value in the year to July. 

Any doubts concerning the ability of ETFs to weather market turbulence were dispelled this year when they rose to the challenge as markets tanked in March. As ETFGI founder Deborah Fuhr notes, “it’s been a good year for ETFs in that it has bust the myth that they couldn’t handle liquidity” (see page 6). 

Meanwhile growing pains are evident as the proliferation of products has created many other products with assets below the $50m level that is acknowledged as being needed to break even (see page 12). One provider believes there are too many products on the same – or even similar – benchmarks. The resulting fragmentation of liquidity, he says, results “in wider bid-offer spreads for investors, increasing total cost of ownership”. 

Greater choice is appearing in more fundamental ways. To date, ETFs have been synonymous with index-tracking and beta investing, yet many within the sector expect an imminent explosion of active strategies to be launched using the ETF wrapper (see page 22). Transparency, a major selling point of traditional ETFs, will be a casualty of this development, yet some believe that full portfolio transparency is not important to most ETF investors.  

While active ETF providers look set to establish themselves in the market, there remain challenges to industry unity. An efficiently functioning market is an industry that works for the benefit of all participants, but the new naming convention, proposed by a few large players as a guide and framework for investors has not been welcomed universally, with some seeing it as potentially disadvantaging innovators (see page 47). The formation of a fully representative global association or grouping of regional bodies could be a smart move as the industry grows and becomes more diverse.  

Martin Hurst, ETF Guide Editor

Editor’s note: this guide contains a number of articles by the sponsors indicated opposite the frontispiece. The publication of these articles should not be taken as an endorsement of their contents.