Currently a professor of finance at the University of San Francisco, Ludwig Chincarini has been involved in the ETF market for more than a decade.
He explains how the industry could grow and how it can contribute to Americans’ retirement plans.
What are some of your predictions for growth in the ETF market?
Honestly, it’s very hard to predict. If you go back to 1998, mutual funds grew from about $5 trillion to $16 trillion today. The ETF market is about $3.4 trillion so even though ETF have grown tremendously, there’s still some room to grow. Of course the growth is going to be slower, because there are so many ETFs. I believe it will continue to grow, probably faster than mutual funds.
An area I think will probably grow more is smart-beta types of products. More in the quasi active or active/passive strategies, whatever you want to call it.
And then all-inclusive products, which aren’t really around yet. What I mean by all-inclusive products are products you buy and it does everything you need to do. I have designed a few but haven’t launched yet.
What will decline probably is the products that companies claim are alternative indices and they really aren’t. I think people will launch them but I don’t think they’re going to survive.
How can ETFs contribute to Americans’ retirement planning?
The biggest innovation is lower fees and lower tax bills. This started in 2003 when I launched the S&P 500 Equal Weight Index. We created in that one a tax methodology that actually I think everyone has copied, and that methodology allowing you to transfer basket of shares basically took away all the tax issues.
I think the fact that ETFs are innovative with lower fees and lower tax bills still helped everyone because there’s more money in the pocket of the retirees.
ETFs helped make retirement easier for people through robo advisors. The reason I wrote a business plan for the first robo advisor in 2003 is because ETFs had just started and it was obviously the next place to go.
It also helped mutual funds because mutual funds had to compete with the lower fees of ETFs and they had to lower their fees.
How will ETFs behave in the next downturn?
I think everything will be fine. I don’t think this is a relevant question in the sense that just like mutual funds and everything else, it’s the same question. But there are certain products that will be under stress. For example, levered products and exotic products. In 2008, the levered funds had problems because the perception was that they didn’t deliver what they should have and there were a lot of lawsuits.
The only thing a downturn will do is that products that were a bad idea anyway will close because there’s no assets. The products that are very exotic have a chance to close but not just because of a downturn. Some ETFS will probably close but they would have closed anyway because they’re not popular and they don’t have assets.