A lot has been going on at Invesco. The firm, the fourth-largest ETF issuer globally, has shuttered more than 60 ETFs in the past two years as it consolidated its ETF lineup following recent acquisitions, including Guggenheim and Oppenheimer. It has also recently launched two offshoots from the massively popular Invesco QQQ Trust (QQQ) that have already hit $500 million in combined assets in less than a month. The new funds, the Invesco NASDAQ Next Gen 100 ETF (QQQJ) and Invesco NASDAQ 100 ETF (QQQM), are now Invesco’s most successful ETF launches ever.
Heading the U.S. ETF and Index Strategy business at Invesco now is John Hoffman, an industry veteran who first joined PowerShares in 2006, when the ETF market comprised only about $250 billion in total assets. Between then and the $5 trillion industry of today, Hoffman has “worn a number of hats,” as he puts it, from building and running a global capital markets business to running institutional distribution to overseeing various sales channels. “I've seen the business from a number of different places,” he says, something that affords him an interesting perspective on where Invesco and the ETF industry as whole can go from here.
ETF.com: Invesco has been busy recently, cleaning up its lineup of ETFs, launching some new funds, all under new leadership. What’s the overarching strategy, as an ETF issuer, and where does it fit within the key trends shaping the ETF space now?
John Hoffman: Our ETF and index strategies business is north of $300 billion [assets under management] today. It’s a large platform. We pioneered the value-added space, and our goal at the most basic level is to remain at the forefront of the ETF industry.
If you think of how smart beta came to be, we started the business on the idea that ETFs are a great delivery vehicle, and we take this benefit-rich vehicle and partner it with more intelligent indexing. That was the concept. Today as we go forward, it’s a very scalable platform.
Innovation is going to be core; however, innovation is going to transcend product development. It's now about the full client experience—how clients interact with us; how we support their business; how we help them create capacity to do more. That's where we're headed now.
Big macro trends such as regulatory change, the growth of brokerage to advisory, the movement to fiduciary, ESG being incorporated more broadly—those things are still in motion, but they’re moving a lot quicker.
The speed of some trends has really changed during COVID—things like technological innovation, the rapid advancement of how money's managed, how risk is measured, how we interact with our clients and each other, things like fractional share ownerships, trading and so on.
I throw that all into software and technology that are fundamentally changing this industry. In the next five years, this industry's going to change more than it has in the past 50 years. We’re very well-positioned to capitalize on those trends.
ETF.com: So, your focus is no longer on product development, but on client experience. Is that the takeaway here?
Hoffman: Yes, but, innovation will still be critical. This year, we expanded on QQQ by bringing QQQJ, which is essentially the next generation, and we brought QQQM. One month in, and they have already eclipsed $500 million in assets. So, we know innovation is going to be critical, but client-led innovation. Our ability to get closer and closer to our clients and understand their challenges and solve their problems is the orientation of that innovation.
ETF.com: Traditionally, a lot of ETF issuers' focus has been on reaching and serving the advisory channel. But there’s a growing conversation about a direct-to-retail movement taking shape. Is that where the next wave of growth will come from?
Hoffman: In my 15 years in ETFs, this question has come up a lot, but more so this year than I've heard before. And I love it, because it's further recognition of this technology.
When we talk about the ETF industry, we talk about the ETF ecosystem. What is an ecosystem? It’s a number of different participants that interact to make the place better. They're each performing their various functions.
We use that term, but a lot of times we think of advisors. The reality is, that ecosystem comprises all sorts of investors that are doing different things with the product—different implementations, different holding periods. And that's what makes this technology so transformative. I really believe this is a significant change in the way of thinking of this space.
The ETF is a transformative technology. It's providing more efficient ways to allocate capital.
Most technologies go through network effects. Think of a fax machine, for example. When it was first introduced, and there's one fax machine on the network, it was not very useful. When there were two, five, 10, a million, everybody's got a fax machine, the network became very powerful.
We've seen these network effects in ETFs play out over the last 25 years. And the network effects comprise different investors coming to the product, and direct investors are definitely one of these network effects. Their implementation is different than a pension or a foundation or an advisor.
All of these coming together using the same product in a democratized fashion is what is creating incredible efficiency for the end investor. And a lot of people are picking up on this network effect around direct investors.
Every day, this network is getting stronger and stronger, and it's adding and accreting more value to the investors. Look at the Federal Reserve. That's a new participant in the ETF market. The network's growing, and it's getting stronger.
ETF.com: That's an interesting way to think about the Fed.
Hoffman: The Fed is just one new participant. Look at Robinhood. It was publishing data on their holdings base, and we observed one of our funds being held in a high proportion on Robinhood relative to other segments.
That was interesting, so we drilled in, and we uncovered that there was a TikTok video with 500,000 views with somebody talking about this particular product. We don't advocate short-term trading; we're focused on long-term investing, and we think that's the proper way to create wealth and reach your goals.
Having said that, all of these different participants in this single place, in this onscreen democratic capability, is just another source creating immense value to the end investor. There's never been a better time to be an investor.
ETF.com: I can't believe we’re going to talk about TikTok, but let's go there. It's definitely a phenomenon. But to your point, chances are those aren't sticky-asset-type channels, right? Or are they opening a door for people to cross into ETFs for the first time, and there they’ll stay?
Hoffman: I'd get back to the network effect in the ecosystem. It is more about all of these different holding periods and views and implementations that create the efficient market, and for risks to transfer. It's less about one particular demographic or one particular segment. All of them are adding value.
You think about a hedge fund shorting an ETF; that’s providing liquidity for somebody else downstream that's buying the ETF. All of that drives efficiency.
If I really widen it out beyond the direct segment, to the space in general, this is just an incredibly elegant product from a design perspective. ETFs seem so simple on the surface, but the simplicity of the design is a major achievement. And that's what's bringing all of these different investors together.
Look at fixed income markets, and the ETF development there. For 15 years, I've talked to clients that would ask, when is this going to break? How is it going to break? Why is it going to break? And we continue to say, this market is persistent and strong.
That was when it was a $100 billion market, $200 billion, $500 billion, and we're now over $1 trillion in fixed income ETFs. The Fed just bought fixed income ETFs. By coming on-screen, the electronification of that market has ultimately created a more efficient way to allocate capital.
And I’ll say this: Every time we have a crisis, the product grows. In 2000, big ETF growth coming out of there. In 2008, significant growth. This year, we’re headed to the biggest year of ETF flows in history. Capital is flowing where it's treated best.
ETF.com: The bulk of asset creations continues to focus on low-cost beta products. Where do you see opportunity for growth ahead?
Hoffman: I’ll point out, again, that our most recent launch has been our most successful launch in our history. In one month, we've had $500 million move into QQQJ and QQQM. There's still a lot of room for innovation.
I'd also frame the conversation away from this notion of active and passive. That terminology is really not accurate. Our clientele, even in our traditional passive products, are anything but passive investors. They're some of the most active investors, expressing views, building active portfolios.
As an industry, we need to spend less time on active versus passive and more time on the outcomes. What is the client trying to achieve, and what's the best way to do that? We continue to see growth in our platform, which is a function of clients getting the outcomes they were seeking.
This space of low-cost bulk beta will continue to be critical building blocks for portfolios. But demand for more precise capabilities to allocate capital remains strong. It all starts with the client.
ETF.com: Invesco is going to soon launch its first round of active nontransparent ETFs. As an issuer, does a nontransparent wrapper really solve an investor problem, or does it just solve an asset manager problem of attracting different assets to the ETF pie?
Hoffman: I’d go back to the concept of starting with the client. In our Invesco ETF and index strategies group, we can deliver solutions in ETFs, unit investment trusts, collective investment trusts, SMA, mutual funds, and now we'll be able to do this in active non-transparent. That's simply the mechanism for delivering investment returns. There are strategies we think are better suited for various wrappers.
But at the end of the day, we start with the client's portfolio and what they're trying to achieve. And then we talk about the strategy and the portfolio allocation to get that. And the last mile is the implementation, the wrapper.
Traditionally people were orienting around the wrapper first—should I buy a mutual fund, an ETF, an SMA? That equation is not oriented properly.
It starts with, what's the portfolio? What are we trying to achieve? How should we allocate the capital? And then, what wrapper should I use? That's what we're trying to get to, being able to deliver that return pattern in whatever vehicle the client prefers.
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