How ETFs Continue To Innovate

Innovation in asset management breathes life into what many would otherwise deem to be an incredibly conventional industry.

ETFs have dramatically improved the way both professional and personal investors build and adjust their portfolios. The look and feel of the ETF back in 1993 is much the same as today, yet the ETF industry continues to innovate with an increased variety of underlying exposures and ever more diverse ways that ETFs can play a part in an investment portfolio.

A Long Road

Like many inventions, the adoption of ETFs has taken time. Two decades later, however, the use of ETFs is gathering pace at such a rate that even the most steadfast of portfolio managers agree that they must consider these instruments or risk becoming asset manager dinosaurs and letting their portfolios fossilize.

About ten years ago, when I first started calling portfolios managers to ask them if they were interested in investing in ETFs, the vast majority were too polite to hang up on me – thankfully. But it was clear that they were paralysed in the way they managed money and could not adapt to this new “technology” called ETFs.

RDR Brings About Change

Most managers were fixed on how much my company would remunerate them. Is that really a sound investment choice from a professional investor – that the remuneration rate be the first hurdle to investing?

It seems almost unbelievable and laughable today. This is something the UK has addressed visibly through the Retail Distribution Review and many other countries are following suit.

Others managers, I still believe, were either simply too lazy to adapt to the changing environment or too afraid of the unknown. They were, after all, seasoned and well salaried investment professionals.

Refusing To Go Online

That kind of behaviour often reminds me, however silly the analogy, of those in my parents’ generation who now refuse to go online. Yes, they can survive without the internet, but with each year that passes it becomes harder and harder to avoid.

So why did I keep calling portfolio managers if I was met with such resistance?

ETFs Are Unique

I persevered because I knew that ETFs offer value in an investment portfolio that no other investment vehicle could. ETFs are unique – they are funds that trade like shares and benefit from the capital market influence also known as “liquidity”. They offer the security of a regulated and familiar fund structure – in Europe this is called UCITS regulation – which tradable derivatives can’t offer in the same way.

Now, 20 years later, Jim Ross, our global head of SPDR ETFs who was at State Street when he launched the world’s first ETF, will say that nobody anticipated the vast growth and applications that these funds would have.

Although the fund structure and way of trading has not changed much, the industry continues to evolve and innovate, offering investors more choice, more precision and, most importantly, more liquidity.

And finally, since we are celebrating International Women’s Day, I want to give a shout out to Pattie Dunn upstairs. Without her brave leadership and investment back in the day as chief executive of BGI, iShares wouldn’t exist.