/Q&A: Babson College – “Investors are going to bypass gatekeepers.”

Q&A: Babson College – “Investors are going to bypass gatekeepers.”

Babson College professor Joel Shulman, who is also managing director of EntrepreneurShares, launched the Entrepreneur 30 ETF in November, tracking the 30 largest entrepreneur-led publicly-traded companies using proprietary research.

His fund provides exposure to US large-cap equities and is predominantly in growth stocks and charges a 0.49% expense ratio.

He thinks that entrepreneurship is by far the most significant factor in explaining excess returns over the peer benchmark.

Shulman shares his views on the overall ETF market, explaining why he thinks innovation will come mainly on the fee structure side and why the crucial question should revolve around when the ETF industry will surpass and supplant the mutual fund world.

What do you anticipate for the ETF market’s growth in the next three to 10 years?

Everybody is going to come up with the same exact answer. Everybody is going to tell you ETF growth is going to continue. In the last five years, it grew from half a trillion dollars to now more than $3 trillion.

The mutual fund market is $16 trillion. A lot of people think of ETFs as the same as mutual funds. While the ETF trend is not going away, mutual funds aren’t going away either. Everybody is in the race. ETFs are clearly going to grow. But the better question is at what point do you see the size of the ETF market compare with mutual funds. How long before we all switched away from mutual funds? I think five or six years is probably a good guess.

Where do you anticipate innovation to come from in the ETF industry?

Investors don’t realize they’re being charged by managers 10 to 30 basis points for execution. Trades don’t go through at the best possible prices. What other things people don’t realize is when you go through a broker, they charge 50 to 100 basis points to do the trade. The gatekeepers– the wealth managers and brokers—should have lower fees. Clients don’t realize they’re getting crappy performance and completely miss out on performance net of fees.

The innovation will happen as soon as investors are realizing the fees they’re being charged. All these other fees upfront need to be eliminated. You’re going to see streamlining, investors are going to go directly to managers and bypass gatekeepers who offer no value add. But that’s going to take some time.

How do you anticipate the ETF market will weather the next downturn?

With robo trading, anytime you have market fluctuations, it’s going to exacerbate swings. When volatility hits, you’ll see it wider and it will create opportunities but you’ll have to be more opportunistic and aggressive.

But don’t try to time the market and pull out because of panic. Stay in there and hold on equities for longer periods of time, also because fixed income performance is going to be awful.

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