SSgA’s Ross Debunks ETF Myths
The head of ETFs for SSgA and one of the people behind the creation of SPY offers his take on what’s preventing wider ETF adoption.
There’s a lot of focus on the quick growth of ETF assets across the globe, but the reality is that the real impact of ETFs isn’t as much about growing market size as it is how they changed client experience, according to SSgA’s global head of ETFs Jim Ross.
Speaking to some 2,250 advisor and industry participants Tuesday at Inside ETFs, Ross said the potential for application, innovation and market growth is exponential if issuers and ETF experts do a better job at explaining and educating how best to use ETFs.
The three biggest ETF myths that need to be debunked, according to him, are:
“ETF liquidity could blow up the fixed-income market”
It sounds like a “fair concern,” but ETFs represent less than 1% of the total fixed-income market, he says. Over time, fixed-income ETFs can be more efficient than other fixed-income products, and assets are increasing, he notes. They also have more transparent trading costs: “Transparency is your friend.”
“Proliferation—ETFs gone wild”
Some ETFs aren’t well-constructed. Some have closed. The concern over poor investor outcomes amid proliferation of products is valid. In 2016, the ETF market saw more ETF closures than launches.
But don’t jump to conclusions, Ross says. Some ETFs don’t work, but that doesn’t mean the ideas behind them aren’t great. There’s a lot that goes into making an ETF find sticky assets such as sales and distribution.
At the end of the day, the key is to understand what you’re buying: “It’s not fund proliferation that can hurt investor, it’s lack of understanding about the products.”
“ETFs fail to track intrinsic value in volatile markets”
In marketwide events, intrinsic value itself may be compromised due to lack of market depth and data, Ross says. But ETFs actually help price discovery in times of challenging markets when other data isn’t there.
It’s important to understand the basics of ETF trading. His tips are to avoid trading near market open when volatility is at its highest and spreads tend to be the widest. Use limit orders, and reconsider stop orders, which were a good source of protection. Finally, if you don’t have to trade in volatile markets, don’t!
“The biggest myth of all about ETFs is that ETFs are just a cheap alternative to a ’40 Act mutual fund,” Ross said. “There’s so much more to what ETFs can do. The real innovation is how they empower the user.”
Today ETFs represent less than 5% of the entire investable market, but if the industry addresses misconceptions and fosters wider usage of the ETF structure, the ETF market could surpass $5 trillion by 2019, and hit $16 trillion or more by 2025, Ross says.
“We need to let investors know ETFs aren’t just a cheap alternative; they allow us to rethink the future of investing,” he said. “They put more power in [the investor’s] hands.”
Contact Cinthia Murphy at [email protected]
