EuroBusinessMedia (EBM): Looking ahead at the ETF market in 2011 and beyond with you, Debbie Fuhr, welcome. You are Managing Director and Global Head of ETF Research and Implementation Strategy at BlackRock, what are your expectations for 2011 in the ETF market?
Deborah Fuhr (DF): Well, what we expect in 2011 is that many of the trends that we saw in 2010 will carry on. We saw the ETF industry both, globally and in Europe, grow on every dimension. So if we look at what we expect, assets will grow in the range of 20 to 30% globally and in Europe; and we also expect that we will see new products, new users and new ways that ETFs are going to be used in.
EBM: Where do you see the risks for ETFs in 2011?
DF: I think the challenge that we see for 2011 is making sure that clients understand what the structure of the product they are buying is - is it a fund, is it a note, is it a partnership? And also, what’s inside of it? So when clients say they want exposure to gold, do they want equities, gold mining stocks or are they looking for physical? Are they looking for a product that’s buying front or forward month futures? So, I think, really understanding the product and what’s inside of it, and the education about all of this, is one of the key challenges.
EBM: In what sectors are clients most likely to use ETFs to invest in this year?
DF: That’s a really good question. I think what we are going to see is what we saw in Q4 carry on into 2011, at least for the first part of the year. And what we saw people doing is a barbell approach to investing. So we saw money going into equities, more than last year, both developed and emerging markets. We’ve seen slightly less money going into fixed income. But we do see people looking at high yield and government. And we also see an interest for precious metals, mostly gold. So that flight to safety in gold and, then, looking for returns in yield, and looking at some of the emerging markets. Those are thoughts that we have in terms of where people will be looking to invest, at least through Q1 of this year.
EBM: What do you think are some of the challenges that the top ETF providers will be facing in adapting their business model to new customer demands this year?
DF: You know, that’s a good question, because what you find is that, as the market evolves, people will have different needs. And so probably a good example is, in the UK, the retail distribution review, which will encourage the financial advisors to say they are independent and hence go away from being told to sell products to looking at providing financial advice and including ETFs. And as that movement is made, many want to have package solutions in terms of funds of ETFs; that would be an area where we are seeing that firms really want to be able to determine how best to select ETFs, how to build different types of portfolios, how to structure them. And so I think the educational need is one that’s growing, and growing on a lot of different dimensions.
EBM: Who will be the key users of ETFs going forward in Europe?
DF: You know, it’s hard to say, because it is a very unique product and one of the few that actually appeals to both retail and retail as well as institutional investors. If you think about most products, you have products that are designed just for high-end institutions and you also have retail, and usually the retail is much more expensive. Here, the same toolbox of products, at the same annual cost, is available to everyone. So we do expect to see growth with the end retail, financial advisors, pension plans, hedge funds, sovereign wealth funds. It’s really the whole gambit, and it’s really all types of investors, because now ETFs cover equities, fixed income and commodities.
EBM: What are some of the key characteristics that clients need to look at when selecting an ETF?
DF: You know, that’s a really important question. The thing you want to think about first is, what is the structure of the product you are buying - is it a fund, a note, a partnership? You want to look at where it is domiciled. You want to look at the size of the product, the average daily volume. You want to look at the benchmark, to make sure it is on the benchmark you want. You also want to look at the provider, because there are differences among the providers in terms of what’s inside of it, their skill in running products. And a good example would be: if you are looking for gold, do you want to buy something that’s investing in gold mining stocks or are you looking for physical gold, a product that’s buying front or forward month futures? So I think you really need to do your homework to determine which is the right product for you as an investor and looking also at whether it’s tax efficient for you.
EBM: What are your comments on the development of the ETC or ETN products, for example?
DF: Well, what we have seen is the advent of ETCs or ETNs really evolved because people wanted to be able to invest - or to make products to make it easy to invest - in mostly commodities. The challenge under the UCITS guidelines is that the index has to be diversified. So it drove the evolution of ETCs or ETNs, which are, in essence, notes. And so, what you find is that these products have made it very easy for retail and other investors to gain exposure to commodities and this has been, I think, beneficial to many, because the alternative would be - you’d have to use futures or swaps, which many people aren’t allowed to do. But I think what you have to go back to when you’re thinking about making investments: “Is this a product that really fits within your financial goals?” Just because a product’s is kind of out there on the shelf, it doesn’t necessarily mean that it’s the right product for everyone to be investing in.
EBM: How do you see the European ETF market in the next five to ten years?
DF: I think that the European market in the next five to ten years will continue to evolve in very positive ways. Right now, we don’t have the requirement for ETF trades to be reported under MiFID. That change will be happening in the near future and I think people will become more comfortable with liquidity, and once things are liquid, people use them more. There’s a little bit of chicken and egg there. I also think the applications and how ETFs are being used will continue to evolve and the user group will continue to expand. So I am very optimistic that over the next few years the growth rate will be in the 20 to 30% and I think that probably going out further that will continue.
EBM: Debbie Fuhr, Managing Director and Global Head of ETF Research and Implementation Strategy at BlackRock, thank you very much.
DF: Thank you.