Why the future is bright for the ETF industry

Industry heavyweights assess current state of investment landscape and how it affects advisors

Why the future is bright for the ETF industry

Advisors must not lose sight of their primary mission: to help investors achieve their goals.

Michael Cooke, senior vice president, head of exchange traded funds at MacKenzie Investments, believes this outlook means the future is bright for the ETF industry.

He said that while this is ingrained at the institutional level, since the 2008 crash, do-it-yourself investors have increasingly realized that they need a plan.

“They need diversification, they need guidance and I think they are also realizing that they are trying to achieve a very particular outcome,” he said.

“Maybe it’s growing a nest egg or buying their first home, maybe it’s a stable source of income, maybe it’s risk mitigation. But everybody is looking for an outcome as opposed to beating a peer group or a benchmark and I think that’s where the ETF market in general has a very bright future.

“It’s not about active and passive. It is about advice in investment management being monetized differently so that you’re trying to help your client achieve a particular outcome. You’re looking at all the building blocks you have at your disposal, whether they include ETFs, mutual funds or individual securities.”

Cooke, speaking at the recent Radius ETF Conference in Vancouver, added that the advisor’s value in providing expert guidance at the helm of an investor’s strategy is where money managers should be making their presence felt.

He said: “You have to manage your cost but it’s increasingly about customizing the outcome for the client and I think that’s what some of the narratives at conferences like this overlook. ETFs can be building blocks in portfolios, where the harmony of active and passive inside diversified portfolios with a professional manager at the top level is providing that kind of guidance to the client.”

Karl Cheong, board director, head of distribution at First Trust Portfolios Canada, addressed the issue of cost compression and said his firm try to be the “advisor’s advisor” rather than compete in the direct end investor market.

He believes fees will come down and that part of the reason for this is the poor performance of equity managers.

“Part of our differentiation has been in the actively managed space,” he said. “We are the largest actively managed ETF provider in the world and we’ve done that through outperformance. We have 31 products actively managed globally and 22 have beaten their benchmarks. So people will pay for alpha.

“The issue is that if you look at the alpha profile of a lot of the equity managers down south or even here in Canada, it’s really not a pretty picture – you are seeing redemption after redemption because they can’t justify their fee.

“Part of it is cost but some of it, the performance has led investors to Vanguard and BlackRock, especially after the financial crisis. And I think the other thing that is pressuring everyone is the regulations – CRM2 in Canada. It’s just making advisors uncomfortable talking about an active equity manager that has just underperformed so economics will lead them to this lower cost. The fees will come down but there is room for differentiation.”