Each January, the professional community that creates, trades, markets, researches and promotes ETFs gathers at the Inside ETFs Conference in South Florida. Hosted by research firm ETF.com, Inside ETFs has long reflected the strength of the industry and the tone and size of the event has generally portended what the year will shape up like for the fastest growing segment of the investment product landscape. And, for the last half dozen years, the "this year it's bigger and more buzzy than ever" hype seems to match up appropriately with the direction of the industry. 2015 saw approximately 270 new ETFs debut, with new entries from the industry behemoths like iShares, Vanguard and State Street as well as hard charging players like WisdomTree and upstarts like PureFunds.
The total new products launched in 2015 increased ETF product totals in the U.S. by roughly 16%. Total dollars invested domestically in ETFs have soared to $3 trillion across 1550 ETP. At the same time, we saw some unsettling glitches in the system - most notably, what happened on August 24th when at least 85 different ETFs saw trading in their shares halted at least five times. (Barron's explains the episode well here: http://www.barrons.com/articles/the-great-etf-debacle-explained-1441434195 ) The incident spurred many to ask "Are ETFs really ready to handle a big market correction and will individual investors get hurt more investing in them than they would if they remained in traditional mutual funds?"
ETF product issuers are quick to point to the issue being a market structure issue. Others say that the rules put in place after the 2010 flash crash had the unintended consequence of triggering the August mayhem. The debate will last for some time, but I'll draw your attention to a larger question: Was 2015 the year we witnessed Peak ETF? Will it be akin to what 2001 was for mutual funds?
Make no mistake, the August 24th issues did slow the momentum 0f the exchange-traded product industry. Individual investors, typically sheltered from the "how the sausage is made" discussions related to funds, were made aware of the hiccups by several days and weeks of coverage of the event. And, some issuers reported intentional delaying of new product launches in late 2015 as a result of poor liquidity for ETFs in the markets - a likely hangover effect from August. At the same time, the markets seem to be creeping toward a precipice where mainstream bonds and domestic equities are all likely to face a comeuppance in 2016. Hardly great conditions for continued asset gathering if lingering doubt over the structure of ETFs combines forces with an epic market meltdown.
Mutual funds, the apparent loser in the ETF vs. mutual funds tug-of-war, had a similar year in 2001. Stock markets had peaked in 2000, inspiring opportunistic mutual fund firms to launch new funds and 2001 - while relatively sideways for the U.S. markets - saw total mutual funds reach its peak level. When the markets hit bottom in 2002, mutual funds began closing up shop. And, even though the categories of funds and dissection of asset classes has only proliferated in the subsequent 13 years, mutual funds have not recaptured the peak total set in 2001. Like ETFs facing the August 24th episode, mutual funds were thrown for a loop by a spate of accounting scandals that forced companies to restate earnings and the demise of the tech bubble. The confluence of events stifled momentum for mutual funds that has never been fully recaptured.
There is a chance, although I'll say it is a small one, that 2015 indeed was the year of peak ETF. New product issuance is bound to slow down, at least as measured on a percentage basis, and some investors will be skittish. The next market depression will create an inaugural batch of investors who lost all their money in ETFs (even if the investment vehicle is only incidental to the experience). The more likely outcome for the ETF community is the the market structure built up to support ETFs will continue to mature and account for potential glitches. Regulators will create rules that speak to the most recent issues and growth will continue.
For marketers and communications professionals like me, our job will only become more challenging as the sophistication of the products increases and the market issues demand greater ability to distill the complex into simpler terms. The ETF community has only begun to capture the attention of the individual investor and can't afford to lose that trust with a failure to account for the nuances of communication.
At Gregory FCA, we work extensively with ETF issuers and other players in the ETF arena on their communications, PR and marketing efforts. We're ready for what 2016 will bring us. Are you?