ETF cheerleaders see good times ahead, with a few clouds

The future of the $1.7 trillion exchange-traded-fund industry looks glaringly bright to the brain trust behind ETF.com, which is calling for ETF assets to reach $15.5 trillion in 10 years and to eclipse the size of the mutual fund industry. “Growth in the ETF space is just getting started and it will explode from here,” said Matt Hougan, president in charge of analytics and publications at ETF.com. Mr. Hougan, joined ETF.com chief investment officer Dave Nadig during a presentation Monday in Fort Lauderdale at the Inside ETFs annual conference. Among the driving forces behind the projected growth is the sleeping giant represented by the institutional investor market. According to Mr. Hougan, institutional investors currently represent 55% of all ETF assets, but only 18% of institutions invest in ETFs. Showing the full 20-year history of the ETF industry, Mr. Nadig called the growth period from 2003 through 2010 “the age of the adviser.” “That was the period that saw a slow trickle of early adopter advisers showing up,” he said. Perhaps not surprisingly, the ETF.com duo took some shots at the mutual fund industry. “When it comes to taxes, the record in the ETF space is nearly flawless,” Mr. Nadig said. “And mutual funds are the least fair tax vehicle ever created in the history of mankind.” For extra emphasis, he presented a slide showing a predictable pattern of mutual fund selling toward the end of the year when investors are trying to avoid tax distributions. “Investing is not one sizes fits all, so there's clearly a need for ETFs, mutual funds and other products that offer different options and benefits to investors,” said Ianthe Zabel, a spokeswoman for the Investment Company Institute. Mr. Nadig said the outlook for 2014 is a steady growth of pure active ETF strategies. “This year is probably the year we start seeing these things show up,” he said. “If you don't think active management will have an impact on the growth of the ETF industry, I think you're just wrong.” But, even with an uber-bullish outlook, Mr. Nadig acknowledged that all is not rosy in the ETF world. “There's a gold rush going in in ETFs, and it's really not that hard to launch your own ETF,” he said. He cited “four worries,” including “products that are actually toxic and will hurt investors, half the smart beta is junk, pay to play is a reality in this business, and a lot of active management strategies that probably aren't very good are trying to ride on a wave of ETF growth.”