Following is an edited version of the keynote speech by Matt Hougan and Dave Nadig that opened Inside ETFs 2015.
Each year, we give a keynote speech at the annual Inside ETFs conference in Florida. In that keynote, we try to structure our thoughts around a single, simple idea: an insight we’ve gleaned from being in this market for the past year, and thinking about the intersections of ETFs, investors, markets and advisors.
And our insight this year is simple: The world is now flat.
As many of you know, that title is borrowed from the great Thomas Friedman book. Friedman’s insight, to quote the ultimate primary source—Wikipedia—was: “The title is a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors have an equal opportunity. As the first edition cover illustration indicates, the title also alludes to the perceptual shift required for countries, companies and individuals to remain competitive in a global market.”
It’s a powerful idea. “The world is flat” meant China could compete with Chicago; that Lagos could compete with London. And what we’ve seen over the 10 years since the book came out is that there have been big winners and big losers in this new, flat world.
For every Mexico and its rising middle class, there is a Spain or an Italy with a collapsing one. For every China emerging from poverty, there is a Russia returning to it.
At the core, Friedman argues massive realignments driven by technological changes leveled the playing field so that the little guys could compete with the big guys.
And we think that’s what’s happening with investing. Just like the Internet and the telephone and the container ship flattened the world, ETFs, technology and other factors are flattening the investment world in a major way.
The State Of The ETF Union
Last year, our keynote was pretty simple. With a media environment often claiming ETFs had grown too big and too complicated, we said it was the proverbial “morning in America.”
We said ETFs had just hit the sweet spot for growth—that we were in inning two of the ETF revolution, not inning seven. We still think that’s true.
We expected ETF assets in the U.S. to grow from $1.70 trillion in 2013 to $2.04 trillion in 2014. That would have been just about the fastest year ever for ETF growth, built on the back of accelerating adoption among institutional investors, retail investors and financial advisors alike.
In the end, ETF assets closed 2014 with $2.01 trillion in assets, on the back of $246 billion in net inflows, an all-time record that topped the previous record for inflows by $40 billion.
In 2015, barring a market correction, we expect to see ETFs set a new all-time record for net inflows and for assets to tack on nearly another half-trillion to end the year at $2.45 trillion.
The reason is that the trends we discussed last year are all accelerating, faster than even we thought. All three major types of investors—institutions, advisors and retail investors—are rapidly expanding their use of ETFs.
These are statistics from the annual Greenwich survey, which is the leading survey of the institutional use of ETFs. And you can see institutional use of ETFs is surging.
The raw percentage of institutions using ETFs is doubling every three years, from about 14 percent to more than 20 percent in 2013. More importantly, the percentage using ETFs as a core, long-term allocation—not just as a short-term place to park cash—is exploding. It’s gone from about 8 percent in 2010 to nearly half of all institutions in 2014.
Why? Because falling fees and rising liquidity have made ETFs in many cases the cheapest way to access particular areas of the market, regardless of whether you’re a mom-and-pop or a massive institution; in a word, because ETFs have flattened the investing landscape.
But it’s not just institutions ...