Building Toward Critical Mass
Beyond the SPDR sector funds, the ETF market continued to develop slowly but steadily, notably with the addition of a growing range of international ETFs as well as the first fixed-income ETFs. A watershed moment came in November 2004, when the SPDR Gold Shares (GLD | A-100) came to market. Its astonishingly quick acceptance—it gathered its first $1 billion in just three days—made clear that the ETF market was coming of age. GLD rendered a historically difficult-to-access asset class accessible to anyone with a brokerage account, making GLD a metaphor for the vast democratizing power of ETFs.
"My boss looked at me and said: 'We can't ignore this [ETFs] anymore,'" Mike Venuto, chief investment officer of New York-based Toroso Investments. He took the plunge and started ETF-focused Toroso in 2012. A late arrival perhaps, but it was a long time coming.
He'd been a student of the ETF space for a long time, consulting for Emerging Global Advisors in 2006-2007 to help get that emerging-market-focused ETF firm off the ground in 2008. In addition, Venuto was an early and successful public investor in WisdomTree Investments, the ETF firm that's now at the center of the white-hot world of "smart beta" ETFs.
Financial Crisis As Inflection Point
RiverFront Investment Group, the Richmond, Virginia, RIA that is now the No. 3 ETF strategist by assets, launched in 2008 in the middle of the financial crisis. When the veteran team of advisors that made up RiverFront left Wachovia following its acquisition by Wells Fargo, they were managing $75 billion, with about 10 percent of that in ETFs.
The decision to abandon that gravy train and go all-in on ETFs was based on a view that enough ETFs were now available to do thorough asset allocation.
"Back in 2000, you just didn't have as many degrees of freedom," said Rob Glownia, a fixed-income analyst at RiverFront. "But from 2008 on, the product availability was there."
Glownia said that availability enabled RiverFront to put its "glass walls" ethos of ETF-derived transparency front and center. The firm is known for tightly focusing on time horizons in construction of its ETF portfolios and for letting its clients know what trades it is making, almost in real time. That transparency remains impossible in the world of active mutual funds.
Who Needs Alpha, Anyway?
Another noteworthy firm that got its start in the ashes of the Great Recession is Boston-based Newfound Research. Its approach to investing centers on tactical overlays that attempt to manage changing risks in the markets and the economy—a task of ongoing pivots that the ETF is perfectly suited to handle.