The financial crisis ended up shining a light on what is so compelling about ETFs, Global X’s del Ama says.
Bruno del Ama picked a tricky time to start his new ETF business Global X Funds—right at the onset of the 2008 credit crisis. Now, five years after Lehman Brothers filed for bankruptcy and helped unleash the worst economic downturn since the Great Depression, Global X has grown to $2.3 billion in assets under management, and carved a niche in a still-quickly growing ETF market now boasting some $1.5 trillion in assets.
In an interview with IndexUniverse’s Cinthia Murphy, del Ama looks back at what the past five years has taught investors, and how, if nothing else, the 2008 downturn helped propel the use of ETFs.
IU.com: Banks today seem healthier and bigger than they were in 2008, and some of the legislation that was supposed to address risk following Lehman Brothers’ fall has yet to take effect. What do you think has changed? Are market risks any different today than they were five years ago?
Bruno del Ama: The big problem in 2008 was the issue of solvency with banks, and that created a whole downstream effect where the value of securities was challenged. Liquidity really dried up, and all of that brought into better context a lot of the benefits of ETFs: A lot of the issues that became important at the time—like liquidity and transparency—are precisely where I think ETFs are very strong.
Back in 2007, 2008, you had massive amounts of structured products such as capital-guaranteed notes being sold by private banks in Europe and in the U.S., and those things essentially went away right after the credit crisis, again highlighting the benefits of segregated vehicles like ETFs or mutual funds.
Everything went down, so performance became an issue across asset classes. Even hedge funds, which are supposed to provide hedges in those types of market environments, failed to do so, and it all went down pretty dramatically. In a way, it highlighted a lot of the risks investors face, as well as the benefits of ETFs and how they perform very strongly in those categories.
I think that was mirrored to some extent in our fund flows. We started our first product in February 2009, when we had only $11 million or so, and by September 2010, we had grown to $1.8 billion in assets.
So what's different? ETFs have become a very prevalent vehicle. From a fundamental economic perspective, the banks are much better capitalized; the regulatory environment with regard to capital requirements for banks—the absolute amount, and the types of capital that they can hold—is much higher. That set up a somewhat-more-sound financial system.
On the flip side, the “too big to fail” type of scenario worsened because a lot of the smaller financial institutions disappeared or were merged with some of the larger banks. Some larger banks that were in difficulty merged with even larger banks. So you actually have a much more concentrated financial services sector.
There’s some good and some bad. Clearly, the background economic environment is much stronger, and the banks’ capitalization is much better, but banks are much more concentrated, and I think investors are starting to forget some of the issues that they experienced with products like structured products back in 2007, 2008. We’re starting to see increasing significance or resurface of structured products certainly in Europe and now in the U.S. private banking world.