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The Evolution of ETFs (Part 3)

The Evolution of ETFs (Part 3)

Prerna Chandak, MBA

Vice President ETFs

With the expected ongoing growth of the ETF industry, investors and fund providers should welcome the continued scrutiny by regulators across the globe. They will continue to focus on potential systemic considerations of investing in different types of ETFs, while local regulators will observe regulatory changes in other markets, with a particular focus on protecting investor interests. The increase in different product structures coming to market means the lines are increasingly blurring between mutual funds and ETFs. This ongoing regulatory evaluation will also help ensure proper classification of a variety of exchange traded product structures, which ultimately provides a better investor experience.

Perceived liquidity risk has been one such topic under scrutiny by many regulators around the world. But market events in the past decade have demonstrated the structural integrity of ETFs going forward. It will be important to identify broader market structure issues and their impact on ETF liquidity. Nonetheless, it will be incumbent upon ETF providers to ensure proper matching between the liquidity requirements of ETFs and the liquidity of the markets and strategies into which they invest. Not every investment is best delivered in an ETF vehicle.

Additionally, trading and operational costs associated with investment management have already come under scrutiny through recent regulatory actions in various countries, which have resulted in greater transparency of costs for investors. Further transparency can only be expected. 


Technology Enhancements and Efficiency

In conjunction with the ongoing push towards greater transparency on investment management costs, technology enhancements (including blockchain and automation) will further drive down costs for asset management, some of which will result in fee savings to end investors, while enhancing profit margins to help offset changing revenue dynamics for asset managers. The further consolidation expected in the industry will also contribute to greater scale, which will fuel further efficiency for those asset managers.

ETF providers in the future will cater to all types of clients including institutional and retail investors and advisors. In so doing, providers will need to substantially invest capital and efforts to enhance the digital experience and to provide personalized service in a scalable manner so clients are able to have more timely information readily at their fingertips.

In the coming years, the best in class ETF providers will be those who continue to evolve their business to be more investor-centric: providing exceptional client experience, delivering thoughtfully constructed ETFs, seeking technology enhancements to reduce costs, and enhancing the governance framework for the ETF industry. The road ahead is bright but it involves a lot of work. The ETF industry will experience further consolidation, liquidity tests in marketing disruptions, and continued regulatory scrutiny.

As the global ETF industry celebrates 30 years of growing investor relevance, the past is prologue. We can expect continued asset growth, innovation and investor satisfaction.

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