The ETF revolution is just getting started

Deborah Fuhr, partner, and co-founder of ETFGI, an independent research and consultancy firm based in London, is one of the world’s most respected voices on ETFs. Fuhr has over 20 years of experience, with 15 years focusing exclusively on ETFs. MoneySense caught up with Fuhr during a recent visit to Toronto to get her perspective on the evolving ETF market and how it’s changing the way investors manage their money. 

MoneySense: The way people manage their money has changed dramatically in a very short time. ETFs have cut costs while the new and growing segment of robo advisors is giving investors access to help that they never had before. How do you expect this trend to evolve?

Deborah Fuhr: I think that millennials are embracing the use of automated or robo advice, but more importantly, and a related trend, many people close to retirement age are using robos to do their homework and to become educated such that they can have informed conversations with financial advisors. Every day in the U.S. 10,000 people turns 65. Most of them have been invested in actively managed funds. So they are going to a robo to learn about what they might do and they like the hybrid model, which is Vangauard and Charles Schwab (in the U.S.) where you can call someone and ask questions. Increasingly the robo is helping people to understand asset allocation. I think the robo is playing a bigger role than people actually understand. Because I think it is a portal for education, which is one of the big challenges.

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MS: But while robo advisors are growing, they are still tiny. Is Canada lagging?

DF: It is bigger in the U.S. but I don’t think the robo is the home of the assets. The robo is playing the role of the source of information so I think the role they are actually playing is slightly different from the role they envision. I still think there is a bit of fear amongst financial advisors and others and that’s why I think people are using Robo-advisors for information as opposed to putting their money with a robo just serving up automated advice.

MS: Are robo advisors sustainable in their current form?

DF: I do think there is a space for robos and I do think millennials will use robos, but they want robos to tailor services to their needs and not just sell them something. So I think they will use robos, but the amount of money they are going to put in is going to be small as opposed to someone who is close to retirement and has money to move around and is now a more attractive client. No one expects them to be a huge pool of assets over the near term, but I do think they will continue to be important.

MS: What appeals to you the most about ETFs? 

DF: I think one of the big things that’s really pushed ETFs is that it is a very unique proposition because it is the only asset management product that, regardless of your demographics, will allow you as a retail investor, a financial advisor or large financial institution to have access to the same tool box at the same annual cost. I as a retail investor investing just $100 can get the same product.

MS: The ETF space always seems to be in flux. What are some of the interesting trends right now?

DF: We are seeing investors look at strategies that we haven’t seen for a while, such as the whole movement towards ESG (ethical, sustainable, governance). Historically if you were going to do good by the way you invested you were going to do poorly by way of performance because it was usually negative screening. The way indices are created now, there are many where companies that are doing good are doing better in terms of performance. I think that’s an area where we are seeing more interest.

Another big thing is China. When it goes into the mainstream MSCI benchmarks I think many investors will use ETFs for exposure to that market because they won’t have the ability to read Chinese research on companies. And to not invest at all would put mean you are underweight in that world market so I think many will want exposure and doing it through and ETF will just make it easier than doing it other ways.

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MS: The ETF market has been growing at a dizzying rate. Are we approaching peak ETF, where the ETF market simply can’t grow any larger?

DF: I think S&P 500 could become a lot bigger because if you look at the percentage of stocks owned by ETFs tracking the S&P 500 it’s still a tiny percent of the total market cap of the individual securities. There are cases in emerging markets where the market is small and there will be a limit on how big the ETF can become. There is an ETF in Vietnam for example and that’s a market that tends to trade $5 million a day.

The very first product in the U.S. SPY—usually you’d see 20 years on that product—and then it would be left by the wayside. But today SPY is still the most attractive product in the U.S. in terms of assets and it’s still actively traded. I do think ETFs have a much longer run in them because there are still a number of people who don’t know what they are and haven’t used them.

MS: How do you pick a good ETF?

DF: First I have to decide what market I want to invest in and then I look at which index best matches the exposure I’m looking for. Then I look to see if there is an ETF or some other product that allows me to gain access to that index. If there is,  I would look at what the fees are for that product, the level of assets, the trading volume. As a retail investor, I think I would look at who the issuer is of the product and if I’m comfortable with the benchmark. And would I be okay if the fund only has a couple of million dollars in it, especially if it is a new product? Remember, ETFs are highly regulated.