Are Reports of the Death of ETFs Greatly Exaggerated?

Nothing is irreplaceable, not even, apparently, the $15.4 trillion global ETF business.

At least two digital technologies aim squarely at the exchange-traded fund as we know it, threatening to end the format that’s been around for only three decades, a blink in the long history of markets.

Tokenization and artificial intelligence may both forever alter the industry, according to recent news and comments from industry experts. While more or less in their infancies, the technologies are in rapid adoption and already shaping the financial world.

Artificial Intelligence

Last week, investing platform Public released an AI tool called Generated Assets, which permits users to create an index with a simple prompt. An Axios article from this week titled “How AI could end the ETF boom” says that Generated Assets makes creating a strategy easier than digging around to find an ETF that suits an investor’s needs or wishes.

Big ETFs with massive scale—think the $661.9 billion Vanguard S&P 500 ETF (VOO) and its minuscule 0.03% management fee—are probably safe. The article points out that smaller, niche ETFs—those with management fees many multiples of VOO and other behemoths with the scale to control those fees—will be “hard to justify as an investment.”

Tokenization

Then there’s tokenization, seen as a potential ETF killer since it renders assets into digital entities, or tokens, and moves them to a blockchain ledger. BlackRock Inc. (BLK), whose $3 trillion iShares business is the world’s largest ETF issuer, has launched several funds that “tokenize” assets, and Fidelity Investments is also putting digital copies of assets on the blockchain.  

Are these new technologies going to render the $11 trillion U.S. industry obsolete? To Mike Akins, founding partner of ETF Action in Denver, the structure of ETFs, which emphasizes ease and simplicity for investors, will keep them safe.

Investors creating their own funds and indexes are sure to create a mess, he said, particularly at tax time when they have to manage capital gains and losses.

“Until a token represents a basket of stocks, I don’t see the benefit,” he said. And AI tools, like crypto, are vulnerable to fraud. “Have you ever seen an ETF get hacked?” he asked.

Ric Edelman, founder of Digital Assets Council of Financial Professionals, isn’t so sure the AI tool is a threat. Tokenization is another matter, he said in an email.

“Continuing technological innovation will render ETFs obsolete, replaced by tokenization,” said Edelman, a member of the etf.com editorial advisory board. The innovation is “only now beginning to enter mainstream engagement by the financial services industry.”