binoculars

If you have been following my column, you know that I don’t believe in market timing — but it is important to look ahead. So I thought I would have fun opining on what the next decade might have in store for ETFs.

I started building ETF portfolios after the financial crisis of 2008. Back then, ETFs were all about generating benchmark returns, which we came to recognize as challenging for most active managers.

Flash forward 10 years and things have changed dramatically with the rise of active ETFs. What might happen if we flash forward another 10 years to 2030? Consider these possibilities:

  • Continued fee pressure will lead to closer scrutiny of ETFs. As the upfront cost of investing goes to zero, that scrutiny will not stop at expense ratios. Trading costs inside an ETF, both equity and fixed-income, will be more transparent and become a differentiating factor for cost-conscious investors.
  • The ETF structure is just a wrapper, and it will be used to wrap just about anything. Since the big ETF issuers track all the plain-vanilla indexes, a lot of creativity will go into thematic investing. Just think of all the different areas of technology that are being offered in ETF format: robotics, nano-technology, automation and artificial intelligence. However, the competitive low-cost structure of these products will mean that only the best will survive and marginal players will be pushed out.
  • By 2030, every actively managed fund will have an ETF version. Canadian ETF assets under management just broke the $200-billion mark. That number will grow exponentially over the next 10 years and I believe that the prediction made in 2018 — that mutual fund sales will never again surpass ETF sales — will hold.
  • The overwhelming number and variety of both passive and active ETFs will confound the average investor. This will be a boost for asset-allocation products: with one click, investors will be able to purchase an ETF that does all the portfolio-building work for them.
  • Huge leaps in technology and data manipulation will make direct indexing increasingly accessible. The custom-built ETF will go mainstream and not just be for the institutional or rich investor. Individual investors will be able to build their own ETFs in the privacy of their homes and access some of the best tax strategies available for a relatively low cost. Whether or not investors will tackle these strategies alone or with the help of an advisor will depend on the complexity of their tax situation and their interest in a hands-on approach to their investments.
  • Ethical, social and governance (ESG) concerns will go mainstream and become standardized in reporting requirements. Every ETF product will have ESG filters, if only because it makes good business sense. Companies will have a vested interest in meeting some form of ESG criteria. If they are not considered environmentally friendly, then they will at least want to demonstrate that they are improving their footprint or striving to meet another form of ESG criteria, such as more women on the board of directors.
  • Over-the-counter bond trading will become obsolete. I’m sticking my neck out here, but I think it could happen before the end of the next decade. When that happens, fixed-income ETFs will finally get the respect they deserve for bringing transparency and price efficiency to the fixed-income realm. There will be a much more diverse fixed-income product line to the advisor. Nonetheless, advisors will need to take a close look under the hood as the product line grows and becomes more complex.
  • Artificial intelligence will take over more portfolio management functions in the ETF space. However, in the roles still reserved for humans, there will be more women managing ETFs — hopefully a lot more.