ETF leaders offer refreshing reminder about active investing
When you attend a panel of experts on exchange-traded funds (ETFs), you’re naturally prepared to hear all about the modern wonders of passive investing. After all, ETF adherents live and breathe index-derived investing, right?
I was refreshingly surprised last month when I had the opportunity to hear ideas on the future of ETFs from business leaders who represent roughly 90% of the ETF industry – literally trillions of dollars in ETF assets. Rather than delivering another sermon on the merits of passive products, these panelists at this year's Inside ETFs January conference in Hollywood, Florida boldly challenged our industry on two major themes.
First, they affirmed that the active vs. passive investor debate has necessarily evolved to an understanding that all investors are (or need to consider being) active investors. They explained that most investors would simply be imprudent to take a completely “passive” approach to investing. The panelists generally agreed that the lines between active and passive investing are increasingly blurred by innovations such as smart beta, which effectively bridges the chasm between traditional active and passive investment strategies.
Second, they urged investors to demand greater transparency in their portfolios – a quality they believe ETFs can help deliver. Again, their message stepped beyond production promotion by recommending active advocacy compared to passively accepting the status quo in our industry’s information practices.
Here are a few key take-aways from the panel discussion:
Dan Draper of Invesco Powershares made the case that as equity indexes increasingly provide investors with more precise tools for capturing different factors. Those practices he calls “lazy alpha” and “closet indexers” will be pushed out of the market by smart beta and “high conviction alpha.” New smart beta indexes will continue to provide investors with a stronger toolkit to improve asset allocation options.
Daniel Gamba of BlackRock iShares explained that investors’ needs are far too diverse for “one size fits all” products. He said a broad range of products can satisfy a wider range of needs he defines as Core investments, Precision exposures and Financial instruments (to replace bonds, futures, swaps). The key of course is for ETF product providers and advisors to focus on educating investors on ways to help customize their investment strategy by taking advantage of the vast array of products available.
And according to William Belden of Guggenheim Investments, the “robo-advisor” trend will actually help broaden access to education and advice for individual investors, especially for those in the Millennial generation, who represent the future for the advice industry. Also, robo-advisors look to be a promising accelerant to asset allocation for the masses, and ETFs will likely benefit from this process by widening access to more investors.
It’s clear that education and a focus on implementation will go hand in hand for the near future. While product providers will continue to innovate and deliver their offerings, we are in a period where product mix and innovation has outpaced investors’ ability to identify how to seize upon the opportunities before them.