Navigating the ETF landscape: Exclusive Q&A with ETF Boot Camp mastermind Tom Lydon

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The exchange-traded fund arena has blossomed in recent years into a diverse investment industry with avenues extending to nearly every nook and cranny of the market. What was once known as a niche product set has proliferated so greatly that Fidelity, John Hancock and other industry behemoths have not only tested the waters, but cannonballed into the ETF pool.

As these waves ripple through the rest of the industry, ETF issuers, exchanges and financial advisers must find their footing in the constantly shifting landscape. Fortunately, there is help along the way.

Tom Lydon, editor and publisher of ETF Trends, puts on an event each year to help make sense of all the ETF industry’s moving parts. The show, known as ETF Boot Camp, has evolved into a resource for those looking to break into the arena, as well as seasoned veterans hoping to get back up to speed.

I will be speaking at the event this year, which takes place in New York on Sept. 29. To find out more about the show, we caught up with Lydon to hear his expectations for the conference as well as his take on various trends reshaping the landscape.

Why did you create ETF Boot Camp and what do you hope attendees get out of it?

Lydon: Even with $2.3 trillion in ETFs, this industry continues to grow. Since we launched our site, ETF Trends, in 2005, we’ve been fortunate to be a beneficiary of the growing ETF ecosystem. But with that, we’re also a source for many people who are in the business and those trying to get in. Because the ETF landscape is changing all the time, we felt that there was a huge need not to market ETFs, but more importantly to take a microscope and look inside the ecosystem once a year to understand everything that’s going on regarding the regulatory world, trading and liquidity, exchanges, marketing, public relations and new investment ideas. ETF Boot Camp is not just for people who are thinking of getting into the business, it’s also for established players and issuers. These people are so busy in their everyday lives that they don’t always have a chance to really check in and see all the internal structural changes and evolutions that are going on.

Q: What are the trends and issues shaping this year’s agenda?

Lydon: Some of the key things we’ll be looking at involve trading. It’s been more than a full year since the Aug. 24, 2015 market shakeup, when there were trading halts and a lot of volatility. Since that time, there’s been a lot of improvements among all of the exchanges. They’ve done a great job of not only working independently but also working together. A great display of these improvements occurred when Brexit was announced. There was a lot of volatility that day, but there were no trading halts on the exchanges and ETFs traded seamlessly.

From a regulatory standpoint, the Department of Labor’s fiduciary rule is going to be addressed. We’ll also talk about the ETF-centric adviser. It seems like advisers that have embraced ETFs are a little different than your average mutual fund adviser. The former tend to be a little more entrepreneurial in nature and tech savvy. They have people in their firm that are younger. They’re open to change and they also operate at a pretty fast pace. They want to be communicated with in a certain way where maybe they’re not taking phone calls or meetings or reading white papers, but instead they want short story ideas where they can dig in deeper on their own time. They like virtual conferences and webcasts. ETF issuers are beginning to understand that ETF-centric advisers want to be interacted with in a different way, and they’re changing the way they communicate with these advisers accordingly.

The Boot Camp has a lot to offer those looking to get into the ETF business, but there’s more than one way to get your foot in the door. Do you foresee more start-ups making an impact or will the near term see more acquisitions for those companies looking to get in?

Lydon: I think we’ll see more of both. We’re seeing more acquisitions and also partnerships form between larger investment companies and smaller ETF firms. In addition, you’ve got some name brand asset managers that have been around for decades who are finally seeing that the ETF industry isn’t going away and that getting into the space will be important for their continuity. They’re coming out with their own strategies, mostly in the smart-beta area. They’re also committed to ETFs. They’re not just saying, “Oh, let’s try it.” They understand they’re going to have to set themselves apart, but because they have well-known name brands, they’re able to get some initial traction. Also, before these firms launch a new ETF, they often go to their existing large clients and ask what kind of strategies they’d like to see in an ETF wrapper. These same investors then invest in these products when they do launch to give them some initial traction and help them get up to speed fairly quickly. Goldman Sachs and Fidelity do this very well.

What else will influence the ETF landscape beyond new issuers and deal activity?

Lydon: You’re going to continue to see bigger players enter the space. It’s not going to slow down. They’ve got distribution, firepower and capital to put behind their ETF teams. However, we have to realize that out of the $2.3 trillion in ETFs, two-thirds is invested in the top 100 funds. These ETFs are mostly represented by Blackrock, State Street and Vanguard. With that in mind, it’s harder to chip away, but it can be done. There are some companies that are getting traction.

ETFs are not necessarily in direct competition with each other; they’re in competition with mutual funds. There’s $14 trillion in mutual funds. We know that actively managed funds have grossly underperformed their benchmarks or competitive ETFs within those asset classes. Especially with things like DOL, more technology and more transparency, it’s going to be really difficult for underperforming companies to maintain assets.

Which emerging companies in the ETF arena are ones to watch? Why?

Lydon: The important names to watch are the big ones like Janus, Fidelity, Hancock, JPMorgan, Oppenheimer and Goldman Sachs. Those are all big, trusted companies that have built-in distribution and great active managers. We’re seeing those management styles can be put within smart beta indexes. They take the best strategies within their funds but put disciplines in place so they can index those strategies and bring them out within an ETF wrapper.

Janus had an initial acquisition of VelocityShares which got them in the space. They’ve also got Bill Gross. He personally loves ETFs, and I imagine we’re going to see more in the ETF arena from Janus. I think we’ll start to see smart beta equity strategies from Janus as well. They’ve got an exciting and vibrant ETF team there, and they also have distribution and support from the mothership so I suspect we’ll see some good things coming.

With that, you’re going to see other players. Nuveen Investments is a name that comes to mind. Davis, a firm known for their great value strategies, is one of the most popular value shops in the mutual fund space. They’re also going to be coming out with ETFs. I don’t think there’s a quality asset manager in the entire industry that isn’t seriously looking at ETFs.

Any final comments about the Boot Camp or the ETF industry you’d like to share?

Lydon: We’ve had an ongoing bull market in equities since the end of the financial crisis. We’ve also had an ongoing bull market in bonds. Being long in bonds and stocks hasn’t hurt you over the last eight years. It’s been a perfect environment for ETFs, and actively managing funds in general has been penalized. So the question is going to be, when we start to see more volatility and market corrections in stocks and bonds, how will ETFs hold up? Will active managers come back into the limelight?

It’s also going to be very interesting to see if there are some smart beta strategies that maybe have cash components. Rather than rebalancing annually or quarterly, are you going to be able to get away with rebalancing more frequently or even holding cash positions? If so, these smart beta strategies will look a lot more like active management.

Finally, one more thing to look forward to at the Boot Camp is a panel called the ETF Shark Tank. We’re going to have three new innovative ETF ideas pitched to a group of ETF experts who will try to run them through the gamut to see if they have what it takes to bring those ETFs to market. We’re going to have fun with that one.

As the fall conference season continues to rage on, check out our previous Q&As with Michael Kitces, Miranda Marquit and presenters from across the financial services and marketing landscapes.