After years of price wars, the ETF industry may be approaching a “natural inflection point” when it comes to fee compression. That’s the view of State Street Global Advisors executive vice president Sue Thompson.
“You can only cut fees for so long before people start looking for gimmicks or taking more risks,” she said.
Given the low level of interest rates and the dramatic appreciation of equities in the past decade, Thompson said she would not be surprised to see market conditions become more volatile.
At that point, liquidity could suddenly surface as an issue. “If we do, look out and look under the hood,” said Thompson, one of the few ETF executives who has worked at the three giants: Vanguard, BlackRock and State Street.
Liquidity, in her view, is like oxygen. You don’t appreciate it until you don’t have it.
Thompson points the high-yield bond market as an example. Much concern has been raised about the explosion in corporate debt and some people have questioned the safety of junk-bond ETFs and mutual funds.
Yet when the junk-bond market froze up during the 2008-2009 financial crisis, high-yield ETFs were the only vehicles that traded.
Other areas of potential concern include the simple fact that there is no time during the day when the U.S. and Chinese stock markets are open at the same time. That can make price discovery problematic. With European ETFs, Thompson said, State Street encourages investors to trade early in the day when both markets are open.