Joseph Smith, senior market strategist at CLS investments, doesn’t buy the notion that ETF fund sponsors have run out of fresh ideas. “There’s still a lot of opportunity there,” he said. “We’re always looking for better ways to capture beta.”
Smith said his firm has virtually abandoned the mutual fund complex, with 95 percent of client assets now in ETFs. And half of those assets are in smart beta funds.
But CLS wants to ensure the funds it buys for clients will be stable over the long haul. Smith said his firm spends a lot of time meeting with fund sponsors to ensure they have the longevity to support their funds. And he acknowledged that fund flows are gravitating towards the biggest sponsors and funds, creating long-term viability concerns for smaller sponsors and funds.
Overall, CLS’s level of scrutiny regarding ETFs has been greatly expanded. “The bar is now much higher,” Smith said.
While the U.S.-listed ETF industry now supports more than 2,100 funds (along with roughly 125 ETNs and other exchange-traded products), it’s hard to envision how the industry will support another 2,000 products. Rather, it might need to cull the herd and close funds lacking the asset base needed to turn a profit for their sponsors. A record 136 ETFs closed last year, according to ETF.com, and this year could bring more of the same.
Still, panelists agreed that fund sponsors continue looking at new fund concepts that deliver clear innovation. One example is the growing number of exchanged-traded managed funds based on the NextShares structure. And panelists at the SSGA event also noted that defined contribution plans such as 401(k)s have yet to embrace ETFs in a significant way.
Moreover, fixed-income ETFs are still not as popular as equity ETFs in terms of AUM, even though the bond market is larger than the stock market. Panelists agreed this is another potential growth area for ETFs.
In short, the ETF industry looks poised for further growth. But the nature of that growth is bound to change.