By Tristan Van Iersel.
Indexing is at the heart of a process that has moved the investment industry from art to science, and the growing popularity of index-based investment has forced all asset managers and advisers to improve their precision and value proposition.
ETFs, in their 25-year history, have become one of the fastest-growing segments of the investment management business. The foundation for the growth of ETFs was the secular growth of indexing, which began 20 years before the first ETFs were launched in Canada (1990) and the United States (1993).
ETFs are traded on stock exchanges like stocks. Unlike stocks, however, they do not get onto the exchange via an initial public offering. Rather, ETFs rely on a creation/redemption mechanism that allows for the continuous creation and destruction of ETF shares.
This year has been healthy for ETF launches. Of the 1,945 ETFs on the US market today, 140 of them began trading this year.
ETFs, a disruptive investment
ETFs have changed the face of investing. With lower fees, greater transparency, expanded access, and greater tax efficiency than traditional mutual funds, they are attracting assets from those funds and threatening classic fund distribution models.
ETFs have also made top-down and cross-market investing more accessible by providing tools that can be used in asset or sector allocation, and thematic investing. They have helped many investors incorporate dynamic strategies in their portfolio management processes by allowing them to adapt to shifting return and risk opportunities.
ETFs are encouraging a new approach to investing that focuses on macroeconomic and thematic developments rather than single-stock investing.
And as a product without a load-based commission structure, ETFs are also accelerating the transition to fee-based fiduciary adviser–investor relationships. These characteristics represent a fundamental shift in the way the financial community operates.
Nevertheless, the success of the top-down, factor-based, or thematic active strategies in ETFs depends on market dynamics and the quality of the investment approach.
Learn more about ETFs by downloading “A comprehensive guide to exchange-traded funds”
Or visit ETF.com, The world’s leading authority on exchange-traded funds that delivers clear, independent and authoritative news, analysis and education about ETFs.
Written by Tristan Van Iersel
