As investors increasingly seek low-cost, transparent investment options, ETFs are poised for continued growth.
In fact, Dave Abner, head of global ETFs and funds at Northern Trust Asset Management, predicts ETF inflows could double over the next decade and he’s been sharing with InvestmentNews how advisors can keep up with this exponential growth.
“Even though ETFs have been around for more than 30 years, there are still a lot of investors who haven’t migrated their portfolios from mutual funds to ETFs,” Abner says. “Advisors can work on educating clients about the differences between the products now and then migrate portfolios if appropriate for their clients’ needs. ETFs provide intraday trading and liquidity, more portfolio transparency, and favorable tax treatment within the structure.”
With the flood of new ETFs across asset classes and strategies, he adds that selecting the right products is critical, along with advisors and investors doing the appropriate due diligence on the ETFs they are planning to use.
“They should understand who the issuer is, how the product is designed, and the expected return drivers,” he urges. “For example, some ETFs use futures instead of the actual underlying assets. These are important things for investors to understand before making investment decisions.”
Despite recent market volatility, Abner remains optimistic about ETFs.
“There is limited risk to the ETF structure itself from market downturns, and often we see investors using market downturns as opportunities to sell legacy mutual fund holdings and rotate into ETFs when they come back into the market,” he notes. “I believe ETFs will continue to gain market share in this investment landscape, and there will continue to be a strong queue of new products coming to market.”
Fixed income ETFs, in particular, are seeing increased interest from investors seeking income and diversification, but there are concerns around bond ETF liquidity.
“The ETF market has matured wonderfully in the last few years. Liquidity providers in ETFs thrive in volatile environments, so volumes in ETFs actually have increased during times of market duress,” Abner says. “Northern Trust just launched a suite of ETFs, called the Northern Trust Distributing Ladder ETFs. These ETFs are portfolios of bonds with staggered annual maturity dates over five, 10, 20, and 30 years, with each year being an individual ‘rung’ of the ladder.”
Abner explains that these ETFs deliver the principal from matured bonds at the end of each year, along with monthly income, which he says provides the principal security that is expected with holding a bond to maturity, with the simplicity, liquidity, and other benefits of holding ETFs.
Looking ahead, Abner expects growth across fixed income categories.
“Municipal bonds, which provide tax-exempt income, and Treasury inflation-protected securities (TIPS) are two areas where there is a lot of product development happening that will be good for bringing more choice to investors,” he says.
ETFs are also playing a pivotal role in reshaping traditional allocation strategies.
“ETFs continue to lead the charge by helping investors address needs that they did not know they had or by delivering solutions that make complex investment questions easier to solve,” Abner says. “In the current macro environment of higher rates and uncertain inflation, we see demand for inflation-protected cash flow management tools, like our Distributing Ladder ETFs.”
Institutional trends are further influencing ETF adoption, Abner explains.
“The challenge for advisors is how to reconcile ETFs that use sophisticated investment concepts compared to simpler strategies that offer similar exposures, but with greater unintended risks,” he says. “Institutional investors are used to using sophisticated tools in their allocation models to manage risk and funding expectations. It is just as important to understand the ‘how’ an ETF gets its exposures along with the ‘what.’”
Abner says that the key is finding the most effective tools to help your clients achieve their goals.
“Some of the most innovative ETFs that resonate best with clients are oftentimes some of the simplest. Innovation does not need to add complexity. In fact, I think the best innovations reduce complexity.”
Finally, as advisors explore direct indexing and personalized solutions, Abner says that ETFs remain central to portfolio construction.
“ETFs can add value to customized portfolios in a number of ways,” he notes. “They can serve as easy, low-cost access to less liquid asset classes where customization is either harder to achieve or not needed. They tend to be lower cost than customized solutions, so strategically utilizing ETFs for parts of the tailored allocation can offer a more cost-effective blend. And ETFs can be used to make tactical changes or add themes to the asset allocation quickly, transparently, and efficiently.”
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