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Deborah Fuhr Sounds Off On ETFs


Earlier this year, Deborah Fuhr, who formerly served as Global Head of ETF Research and Implementation Strategy at BlackRock and Barclays Global Investors, and co-founders Shane Kelly and Matthew Murray started London-based research company ETFGI.

The firm's mandate is to provide a number of services including thought leadership and independent research to investors, industry regulators and others related to the growing exchange-traded fund industry. Money Management Executive recently spoke to Fuhr about her latest venture and trends that she's seeing within the ETF space.

Why have you located your company in England?

This was my home. I had been working here when friends said I should open my own firm, that there was a need for this type of service. I decided that because of so many regulatory and tax changes and the growth in the number of ETF providers, they were right. Also, this is a good base relative to time zones. I'm able to speak to people easily in Asia, Europe, the Middle East, Latin America, and the U.S. In Europe you have the ability to talk about products globally, whereas in the U.S., you should really only be talking about U.S. funds, registered for sale in the U.S.

You've stated that ETFGI provides "better independent education, research and customized assistance to investors seeking to navigate the vast array of ETF products." What do you do that's different?

Having extensive firsthand experience in the industry and being independent are important. When I started covering them in 1997, there were only 21 ETFs and $8 billion invested in them. Researching and writing about ETFs, and engaging with people globally who are designing them as well as with brokers, investors and exchanges, is a unique proposition. Once when I was at an airport I figured out I had visited over 52 countries educating people on ETFs. These included sovereign wealth funds, pension funds, mutual fund managers, hedge funds, regulators, advisors, private banks, family offices, and banks and brokerages trading ETFs. Also, we're researching ETFs globally. Many companies tend to look at them only in one country.

How do you plan on marketing your research?

I plan on speaking at events and calling people directly, and we've had inquiries about consulting projects. I also have quite an active LinkedIn group, ETF Network, with over 6,500 global members. Our forthcoming website will allow people to access our reports and other tools, and we'll also be offering an annual subscription service that will have more detailed reports than what we now offer. We'll report on flows into net asset classes, or where the "smart" money is going, for example, as well as on providers of ETFs regarding market share, trading volumes, and so forth.

What are your views on active ETFs versus passive ones? Is there a market for them yet, or is it too soon to tell?

If you look at active ETFs, the PIMCO active bond ETFs have been successful in the fixed income space, but fixed income benchmarks are usually big --sometimes there are 6,000 different bonds in them. So it's easier in that space to not be an index tracker and continue on the same path, showing everyone, every day, what you're doing in your fund. An ETF provides transparency daily on what securities in the fund.

If you return to the S&P 500 story and look at equity funds, you find that fund portfolio managers don't like to tell people what funds they're holding. That information is like their grandmother's "secret sauce." So you tend to find that well-known, active stock pickers are not likely to make their funds into ETFs because they don't want to tell everyone daily what stocks they're holding.

The growth of active ETFs has been small; less than 1% of total assets globally. Just because a fund is an active ETF doesn't mean it's going to perform above the benchmark. Last year, 81% of actively managed funds didn't beat the S&P 500. The success so far has been in the fixed income space.

Smaller ETF providers have to differentiate themselves via niche strategies and pricing. How else can they remain relevant?

If you go back to what they teach in business school about what makes a product successful and apply it to ETFs, it's choosing the right product (the right benchmark), being in the right place (how you list it) promoting it effectively, and setting the right price. It's also working with what I call the ETF ecosystem, to make sure all of the firms that are needed to make the ETF successful, work together. Think of the investor as sitting in the middle of the bulls eye on an archery target. In the surrounding rings, the supporting players are the provider of the ETF, the brokers that trade, the index provider and the exchange.

You have to make sure you have good brokers and that they understand your product and know how to trade it and execute redemptions. The exchange is important for raising awareness and ensuring the infrastructure is there, and the index provider is important as well. If I'm an S&P 500 manager, I might use sector ETFs to equitize cash, or as a core holding or a satellite. I would only do that because I already know the S&P 500.