Mr ETF gives a bullish view as he looks at global growth
THERE has been a global boom in exchange-traded funds (ETF) over the last fourteen years. But according to Jim Ross, global head of ETFs at State Street Global Advisors, there is still a lot more room for growth.
Having launched the first ever ETF with State Street on 22 January 1993 – the SPDR S&P 500 ETF, which is now the largest ETF in the world with about $85-$95bn invested in it – Ross is the ideal person to offer an informed perspective on the industry. State Street is the biggest ETF provider in Asia-Pacific, the second biggest in the US and is now looking to grow its business and brand in Europe.
The global ETF industry has mushroomed. There are currently about 2,670 ETFs, with nearly $1.5 trillion invested in them, $1 trillion of which is in the US. Ross notes a number of facets that made ETFs successful: their structure doesn’t suffer from the demand price fluctuations that hit closed-ended funds and they allow investors to easily gain access to different assets. He also thinks that one key tenet in the US, which people don’t focus on in Europe, is the ease of buying and selling ETFs, thus making it easier to work out asset allocations. Ross believes that with asset allocation making up about 90 per cent of returns, ETFs, though often passive, are being used in a very active way.
EDUCATION IS KEY
Although State Street doesn’t currently offer synthetic ETFs, Ross doesn’t see anything intrinsically wrong with them. He says physical ETFs offer the advantage of transparency, but suffer from tracking errors. Synthetics might be able to eliminate some of these errors, but investors need to ask themselves if they understand them. Ross says: “I think it comes down to asking if the product has acted as you would have expected.” As such, he suggests investors look at the ETF’s history, understand the risks in the product’s structure and then weigh these risks against the risks in others. As such: “If you think there is an unknown risk, you have to make the decision that you are comfortable with that.”
Ross thinks the current debate in Europe over synthetic versus passive mimics the debate in the US when inverse and leveraged ETFs came out. Once investors became properly educated, they were able to make an informed choice – some stuck with them, others decided against it. Ross points out that in registered funds investors have been doing it for years “whether they think about it that way or not.” Ross sees it as the responsibility of providers to give the tools, education and transparency to providers to see how they achieve their returns.
A BRIGHT FUTURE
Having seen his ETFs through the trials of the dotcom crash, 9/11, the global financial crisis and the 2010 flash crash, he says: “We have been through a lot of uncertainty in the markets and the ETF structure has proved to work well.” Ross believes education is the key to bringing in more investors: “I look at ETFs as barely established right now from a European standpoint. It is semi-established in the US, but both marketplaces have significant growth potential.” Ross thinks that the 20 to 30 per cent growth seen in the US over the last decade is set to continue. He might be right. With the Retail Distribution Review (RDR) coming next year, the progress of ETFs looks unstoppable.