Bloomberg recently published an interesting article regarding financial products on Wall Street; namely the proliferation of products such as exchange-traded funds. Is the sheer number of investment vehicles excessive? Most likely.
Products such as exchange-traded funds has “gotten out of hand,” Vanguard Group Chief Executive Officer Bill McNabb said last week at a conference in Chicago. “The industry is (introducing a new) ETF, it feels like, every 30 seconds,"
Are they making them for fun? Apparently not as May marked the 28th straight month of capital inflows from investors.
Worldwide, the ETF industry had created 4,602 ETFs, with 9,764 listings, assets of $2.996 billion, from 247 providers on 63 exchanges. A key fact to remember is that the majority of these products aren't actually money makers. Most of the capital inflows still head towards popular investments such as the SPDR S&P 500 ETF Trust or the SPDR Gold Shares.
Now according to Goldman Sachs, the $3.5 trillion ETF industry could double in the next four years.. As such, they introduced an ETF offering incorporating a 9 basis point annual management fee. Bloomberg goes further, suggesting the highest growth potential product are smart beta ETFs, with BlackRock forecasting “annual organic growth” of 19 percent a year for these ETFs, reaching total assets under management of $1 trillion by 2020 and $2.4 trillion by 2025.
As we all learnt in introductory macroeconomics, the economy corrects itself in the long run. The same idea can be applied here where investor demand, in fact, weeds out the unnecessary additions. Feel free to take a read at the original article: http://www.bloomberg.com/view/articles/2016-06-21…
Are there too many products? What should institutions do instead?
Looks to me similar to the junk bond boom in the 80s, tech bubble in the late 90s and subprime mortgage crisis in 08--people love to invest in new things even if they don't understand them just because other people are doing it, and that lack of understanding can blow up prices to way above the value of the product. That is, until there's a correction, as there was in all three of the instances I mentioned. Not to say that the products don't have value, but when people are investing just because others are doing it there's nowhere to go but up until people start to realize that it's worth quite a bit less.
I think it's a fad, not necessarily a bubble or boom. They'll be around a long time, though my projections on the size of that market are less than those championing (and profiting) the products.
The reason people love ETFs is that their relatively cheap and easy. You used to had to buy physical or get scammed on a structured note in order to get exposure to gold. Now it's as easy as buying GLD. Same with SPY. You'd much rather buy a few etfs, pay a few bps in fees (cheaper than a mutual fund) and control your investments that way.
There's been a big shift towards passive investment options as alpha generated by active managers has decreased. However, I think this cycle will reverse in the future. Even so, I don't see etfs ever getting killed off since their so easy and cheap to deploy cash into.
To be honest - I reckon the proliferation of ETF's might inadvertantly be done to take advantage of the inevitable arb opps that arise.
Like nowadays S&T floors are gonna have an ETF-arb desk around. I mean it makes sense to me - have an ETF product - it's slightly dislocated - I should recreate it via individual stocks or futures or even delta one options, or hell a combination of all of the above. The more ETFs you have, the more anchor points you have to arb.
Just a thought - maybe I'm crazy though.
The market can't just be people trading ETF's to each other, it's going to over-correlate things. I personally think it's mostly bad, risk-on/risk-off tards being enabled.
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