State of the Union: ETFs

Ladies and gentlemen, the state of ETFs is stronger than ever. I am proud to report that US ETF assets have reached an all time high surpassing $ 1 trillion dollars. In 2010, ETF assets grew over 28% with healthy increases across all asset classes. These numbers represent continued evidence that the efficiency, transparency and flexibility found in most ETFs is being embraced by investors. At the same time many asset managers — from mutual fund companies to broker dealers — are lining up to participate in the ETF marketplace. This endorsement by investment peers, validates the ETF vehicle and industry and will fuels its continued progress. Today the ETF vehicle is easier to access, less costly to own and provides more investment selections than ever before. Yet with such substantial industry progress and growth there are challenges to address. These challenges are the opportunities of tomorrow and if history is our guide, the ETF industry will rise to these challenges.

Economics

ETFs are becoming less expensive for investors to access. A variety of broker dealers now allow no fee trading in select ETFs. This trend has continued to grow in the last year allowing less costly dollar cost averaging. Expense ratios for many of the most popular ETFs are not going up, instead they are going down as ETF sponsors compete on price. This has increased the cost efficiency argument for ETFs. In the last year a number of small unprofitable ETFs have closed and more closings will happen in the future. While no one desires ETF closures, the path of innovation in any growing industry leads to winners and losers. Like mutual funds, some ETFs do not attract investor assets and are destined to close. The orderly and professional closure of ETFs will continue to occur and must happen to maintain a healthy ETF marketplace.

Policy Matters

ETFs have weathered a variety of tumultuous events over the last year including the Flash Crash and stock exchange software glitches. These events have resulted in important new dialogue, procedures and regulations that have made US markets, and consequently ETFs, more stable. Consistent and thoughtful exchange traded regulation will continue to ensure that all investors can have confidence in exchange traded securities. The ETF industry needs to focus and unite to engage regulators and exchanges to proactively deal with potential market structure issues before they become a reality. As this dialogue continues to build a solid foundation for ETFs, the ETF industry must encourage and seek to standardize ETF related data. Creating a universal data standard will allow investors to carefully and quickly compare products and their unique characteristics. The mutual fund vehicle has benefitted for years from standardized data. This has been done with the help of several third party data firms. The ETF industry is now large enough to support similar efforts that must be specifically tailored to the unique data profile of ETFs. Standardize ETF data and the ETF world and its benefits will open to many more eager investors.

Education

Tweaking a line from political consultant James Carville and applying it to ETFs, the future success of ETFs “is all about education, stupid.” Time and time again, as investors are educated about ETFs, they take advantage of the vehicle’s unique features and benefits. This in turn introduces more efficiency, transparency and flexibility into the U.S. investment landscape. However there is still a lot of work to be done in order to educate the investment public, and even professionals, about ETFs. Indeed in a year that saw a variety of misinformed attacks by academics and journalists, it was a lack of education about ETFs that was actually being highlighted, not reality. ETF Sponsors, research providers and financial media all need to step up their efforts to promote education and awareness of the ETF structure so that more Americans can economically benefit from this progressive investment vehicle.

Conclusion

ETFs exemplify the spirit of innovation that makes America great. In this industry the small investor is afforded the same access to investments as the institutional investor. The flexibility normally reserved for owners of individual securities is granted to those who own packaged products. And finally the cost and tax efficiencies of the vehicle are passed on to all shareholders, regardless of size. The ETF business, like the United States, also remains a land of opportunity for investors and asset management firms. It has provided immense benefits to all by promoting more transparency, efficiency and flexibility in the marketplace. The ETF industry must continue to rise to new challenges but I’m confident it will not waiver in its determination to provide value for investors. Indeed, for ETFs and ETF shareholders, the best is yet to come!