EuroBusinessMedia(EBM): It’s been exactly 20 years since the first ETFs were launched and today we are celebrating the 10th anniversary of the launch of ETFs in Europe with you, Deborah Fuhr, welcome. You are the Global Head of ETF Research and Implementation Strategy at BlackRock. We’ve seen a faster growth rate in Europe in terms of assets under management or the number of products and providers than
we ever saw in the US during the first years that ETFs were traded in that market. So why has ETFtake-up been higher in Europe than in the US?
Deborah Fuhr (DF): I think it’s probably because ETFs were available in the US for 10 years before they came to Europe, so many investors were familiar with what an ETF is and the benefits, and I think we have really seen over the years that both retail and institutional investors have embraced ETFs as a very good tool, because it’s a back to basic environment - so they are simple, transparent, easy to use and provide the same fee structure for large institutional investors as well as for retail, which is quite unusual.
EBM: What are your growth forecasts for the ETF market this year and what type of investor will fuel that demand, retail or institutional?
DF: My expectation is that we will see the ETF industry in Europe grow over the next few years on a 30% compounded annual growth rate. And I think what we are going to see is increasingly retail and the financial advisors will be embracing ETFs, as well as we’re seeing more institutionals use ETFs, because what we are seeing is that you can now use ETFs to implement exposure to equities, fixed income and commodities, so if you want something as simple as exposure to the CAC, the DAX, the FTSE, there’s also MSCI emerging markets, we have inflation, government high-yield bonds, various types of commodities, so I think we will see growth in terms of who is using as well as in the types of ways people use ETFs. So we are seeing funds of ETFs being launched, we are seeing people use them to implement exposure to various asset classes as core holdings, as well as as satellites.
EBM: Despite the growth of ETFs covering alternative asset classes, why do you think that most of the ETF market remains focused on broad market indices?
DF: I think that really goes back to the idea that ETFs are really good, core, Beta building blocks, and so many investors have embraced them as good tools for the benchmarks that everyone uses. And then the alternatives are never going to be a huge part of your portfolio, so I think that the alternative products will gather some assets, but the core, Beta building blocks will continue to be as I call them, the workhorses. So a lot of assets will keep going into theses great building blocks and other things will be used as satellites or smaller allocations, and so I think that trend will continue.
EBM: Because ETFs are becoming so popular and widespread, some products that call themselves ETFs can be misleading. What should ETF users watch out for in order to avoid any confusion?
DF: Well, I think, like anything, if you are investing you should read the prospectus and make sure you know and understand them. And I think you should look at your long-term horizons – Where would you like to be and what is your appetite for risk? So clearly you don’t want to put all your money in emerging markets if you don’t feel like you’re willing to have a riskier exposure. I think what we hope is that the regulators will actually help to clarify definitions. So I think product innovation is good, but it’s helpful to remember that the good, old fashioned ETF - Exchange Traded Fund -is an open ended fund, its assets are held at a custodian, ring-fenced from other funds and investors, it’s tracking an index, it’s transparent on what’s inside of it, has an indicative NAV, so you can see the price real time during the day on the exchanges. And it has what we would call the in-kind creation/redemption. So today we see many people launching notes and other types of products, and I think the challenge is that as the industry has gone through a trillion dollars at the end of the year, we see many people wanting to launch ETF type products. So I’m not saying one is good or bad, but I think clarity on what the structure is and what’s inside of it is essential for everyone to feel comfortable going forward.
EBM: Traditionally ETFs have been considered a passives index-tracking investment product, although we have seen now the launch of some active ETFs over the past two years. Are we going to see an increasing number of active managers and product providers entering the ETF space in the coming years and what will this mean for the sector as a whole?
DF: Well, I think that is a good point. As I was just saying, more people want to get involved in the ETF industry. A trillion dollars is exciting. And if you go back to 2008, during the financial crisis, the ETF industry in Europe was, I think, the only area where we actually saw assets increase – they increased by 11%. So that year we saw the net sales of mutual funds be - 495 billion, while the net sales of ETFs were +78. So whether it’s in a rising market or in declining, ETFs always seem to do well relative to other investments. So I think what we’re going to see is that some new entrants will come in and launch products, others I actually think will embrace using ETFs as building blocks inside of fund strategies they are launching. So as an example, an asset manager of a private bank might launch a new fund, where inside of it is ETFs doing asset allocation, sector rotation, global Beta or something else, and they are using other people’s ETFs. And that means that as an asset manager, you can get paid for the asset allocation of the overriding fund, you can also pay distribution fees which ETFs don’t do. So I don’t think that we need necessarily more managers of ETFs, because clearly as an example, today in Europe we have 32 Euro Stoxx 50 ETFs with 113 listings. So clearly we don’t need another Euro Stoxx 50 ETF. So I think that using the tool box that’s out there is probably the way we’ll see more people come into the ETF industry.
EBM: What has been the impact of the recent financial crisis on the ETF industry?
DF: One of the interesting things was that we saw during the financial crisis, that when Lehman filed for bankruptcy, Bear Stearns was having their issues, what we saw was investors, especially in Europe, became concerned about using certificates, swaps and structured products, because you have counterparty issuer risk . And what we saw was investors really prefer to use ETFs that are funds, held at a custodian, ring-fenced from other funds and investors, because you don’t have counterparty issuer risk. The other preference was that with ETFs, you can trade them on exchange, any time during the trading day, with multiple brokers. So what we saw was that there was increasing volatility in 2008 - we actually had 18 trading days when the S&P 500 index moved in one day by more than 5%. So if you were using a traditional mutual fund, you would have to wait till the end of the day when the fund prices its assets and says “Here’s your price that you get in or out at”. Emotionally that was very difficult for people, because you felt like you lost 5%. So what you’re finding is people were preferring ETFs because you could get in or out very easily, any time during the day. And I think that the other challenge is that it’s hard to find good active managers. So what you’re finding is, people are rationalising “Where should I spend my risk budget to find alpha? and looking for good alpha managers, and where they can’t find that, increasingly they are embracing ETFs. So we actually saw that 2008 was a year that many people tried ETFs for the first time. Which is a key thing, it’s like anything, if you say ‘Oh gee, I’d like to go to the gym some day’ - until you go and do it and find it’s actually fun, it’s always a little bit of “should I or shouldn’t I”. And the same is true with ETFs. Once people do the first trade, they find that is very easy to use them and they think of them and they use them more often. And so what we are seeing is that any time there’s been a financial issue or crisis, ETFs have actually done really well.
EBM: Lastly, what developments do you foresee for the ETF industry in the near to medium term?
DF: My view for the next few years, thinking about ETFs, is that we will continue to see more users using them, whether it’s retail, whether it’s institutions, and really around the world. We are seeing that it is a product that really works everywhere in the world. And it’s really because ETFs can be tailored. If you have clients that want Sharia, they want socially responsible, if they want fundamental indices, if they want market cap, ETFs can allow you to very easily, in very small sizes, get exposure to almost any segment of the equity, fixed income, or commodity market. And if you’re large, they really prove to be very good, low cost, Beta building blocks. And clearly in Europe, what we are seeing among institutional investors is many are saying that their important or most important year of new product development is multi-asset class investing. And most managers, even sitting at BlackRock, BlackRock would say, “We can provide alpha in a lot of funds that we run”, but it’s not true that in every segment of the equity market, every segment of fixed income, every segment of commodities that any firm can deliver alpha all the time. So that’s the beauty of ETFs; there are tools that every firm can embrace in different areas at different times. And multi-asset class strategies clearly encourage people to look at ETFs, because you go back to the old Brinson Beebower study that says “Getting your asset allocation right will deliver pretty much 93% of the returns of your portfolio”. So ETFs are a useful tool to use in that regard.
EBM: Deborah Fuhr, Global Head of ETF Research and Implementation Strategy at BlackRock, thank you very much.
