The Next Five Years In ETFs

That is the title to a post by Matt Hougan over at IndexUniverse. Five years seems like a long time for the ETF industry think of where it was in 2004 versus now. The next five years could see even more change than the last five.

In his post Matt talks about seeing a few funds in the filings that could become very important but doesn't say which ones. He also mentions big firms that are not yet in the business, like Schwab, getting in and staking a big claim. There are many S&P 500 index traditional mutual fund so there can be more than a couple of SPX ETFs.

The other point he made that stuck out to me was some ETFs being targeted to investors while others are targeted at traders. Interestingly there was no mention of actively managed ETFs (I think actively managed ETFs are huge so what).


I would add that by 2014 we will have flying cars and be eating all our meals in pill form. Ahem.

The biggest thing may not be ETFs but what gets done with them. One of the great things about them (and I am surprised how few people touch on this) is that because they are indexes mostly (even the narrow based ones) you know what you will own six months from now. Not so with actively managed products. This makes integrating them into a portfolio seeking specific effects is easy to do. If BP and Total (TOT) are the two largest stocks in your energy ETF today, chances are they still will be six months from now.

Given the potential utility this offers I think we will see products the bundle ETFs together in search of some other effect. Maybe this means long short or customized pairings like something that is 75% materials ETF and 25% one materials stock or anything else. Maybe they would be called Alpha Bundles or Core (the narrow ETF) & Explores (the stock). These would allow brokerage firms to market research ideas into investable products that are less risky than just buying the stock.

To be clear I'm not saying these will be good things, should they come, but they would be a way for brokerage firms to stay relevant and offer more than SPY/IWM/EFA combos to people.

I imagine there will be more country funds (GlobalX has an Egypt fund in the works), currency funds (WisdomTree filed for just about every currency but I have given up on them actually listing them) and a lot needs to happen with fixed income ETFs. Matt mentioned that he thinks the PIMCO TIPS funds (there is three of them now) will turn out to be important. ETFs bring more to the table than a lot of people realize,a t least for now. More market participants will see the real value and make more effective use of them.