A World of Opportunity for Exchange-Traded Funds 3.0
October 10, 2011
As head of global exchange-traded fund services at BNY Mellon, Joe Keenan has a front-row seat on developments in the exchange-traded fund industry. As such, Keenan fully expects ETFs to continue their incredible success story. Money Management Executive Editor Lee Barney recently spoke with Keenan on the drivers of ETF growth.
MME: What developments in the exchange-traded funds coming to market strike you as the most interesting?
Joe Keenan: There certainly have been an extraordinary number of innovations in the ETF space, most notably the ever-increasing interest among established asset managers to develop their own exchange-traded funds across all asset classes-including passive and actively managed products. This is exciting for us because we think there is long-term potential, for the next several years at a minimum, for even more clients and prospective customers to enter the ETF space.
But in order for new entrants to successfully jump into the fray, they can't simply plan to launch another S&P 500 fund. A "me-too" approach really is not going to be the cornerstone of a successful business plan, be they a large, established asset manager or a start-up.
Instead, new players first need to assess what is unique about their expertise. Do they have a lock on a particular distribution channel? Are they renowned in the fixed income or equities area? Are they best known as a stock picker, and thus able to parlay this expertise into actively managed products?
These firms also have to decide whether they are going to slowly enter the ETF market with a toe in the water-or whether they are going to be more aggressive and go wholesale across their entire family of traditional mutual funds. The best example of this is PIMCO and their leap into the ETF space with the announcement of plans to extend their franchise with a new product that will seek to replicate their famous PIMCO Total Return Bond Fund.
Take a look at what Vanguard has done. Historically, they have been viewed as the indexer for retail products. The emergence of iShares' competition has prompted Vanguard to respond with a call to arms-and they have been extremely aggressive with regards to competing on total expense ratio for these products.
There has been continued willingness among large and small asset managers, as well as discount brokers, to compete on price to the point of lowering index based ETF fees to as low as five basis points. Even for a $100,000 investment in an ETF, the difference between these fees is more about optics than true expense, so at some point, the industry will reach a tipping point on this pricing battle where it is no longer viable for firms to launch ETFs with such low fees, or what we are calling "cheap beta products." On top of this, some brokers, Schwab, Fidelity and TD Ameritrade, for instance, are offering ETFs with zero commissions.
MME: In terms of specific products, what new ETF sectors do you find interesting?
Keenan: Certainly, there has been a continued focus on commodities. At BNY Mellon we support nearly 600 ETFs globally, 475 of which are in the United States. In terms of total assets, we administer have $240 billion, of which $75 billion is in commodities products alone For instance, we are the trustee for BlackRock's iShares Gold ETF (IAU) and iShares Silver Trust (SLV). We also support commodities products for ETF Securities, WisdomTree, Deutsche Bank, GreenHaven and Teucrium, just to name a few. We have continued to see growth not only in these funds, but we have been in an active dialogue with firms seeking to capitalize on this interest in commodities, both in terms of their performance as well as the ever-increasing interest among investors to place their money in assets that are not correlated to stocks and bonds.
This tight correlation between stocks and bonds has been pushing investors into specific, targeted commodities asset classes, such as precious metals-or into broad-based commodities products.
As proof of this, we recently engaged the leading consulting and market research firm Strategic Insight to do a study for us, "ETFs 2.0: The Next Wave of Growth in the U.S. Market." It validated two things. First, our growth expectations: the ETF servicing business is one of the fastest-growing areas at BNY Mellon. In another recent study, McKinsey & Co. projects global ETF assets will exceed $3.7 trillion by 2015.
Second, we expect the next wave of ETF growth to be in more innovative and novel products, whether they are passive, fundamentally weighted, based on novel benchmarks or tied to a very focused, tactical segment of the market, such as our client First Trust's Smartphone Index Fund ETF.