Have we just experienced the decade of the ETF?
In 2010, about $1 trillion was invested in exchange-traded funds. As the decade draws to a close, ETFs have more than four times that amount, according to the Investment Company Institute . But what comes next may dwarf the explosion of interest these products experienced over the past 10 years.
In fact, investors, analysts, and behind-the-scenes fund-industry folks interviewed by MarketWatch envision a vastly different investing landscape ahead.
By mid-decade, according to one pundit, there will be more money invested in ETFs than mutual funds. Your 401(k) plan may – or may not – offer ETFs. And for all the talk about “active versus passive,” the coming decade may make that debate moot, as more individual investors start to design their own products, rather than relying on professional money managers.
Dave Nadig, managing director of ETF.com and a veteran in the field, has been making the same stump speech since 2009. At some point in the future, he tells an industry gathering every year, ETF assets will surpass those of mutual funds. Nadig first made that prediction in 2009, telling his audience the “cross-over” date would be 2025. “They’re still laughing at me,” he told MarketWatch, even as his date has moved up one year, to 2024.
Nadig’s thesis: “Over the next 10 years there’s no reason to think we’ll see anything other than what we’ve seen over the last 10.”
And the last 10 have been dominated by a knee-jerk reaction on the part of seemingly the entire investing industry. It just hasn’t been worth it to pay more to active fund managers to do lots of buying and selling of portfolio holdings, especially when years of research shows that those managers get lower returns than funds that simply follow an index.
“Low-cost passive is an inexorable force,” Nadig said.
But the allure of ETFs isn’t only about rock-bottom fees. ETFs are more tax-advantaged than mutual funds, and the range of product offerings also appeals to investors who want “flexibility,” rather than just following the well-worn strategies of past generations, said Denise Krisko, president and co-founder of Vident Investment Advisory.
ETFs like the ETFMG Alternative Harvest fund /zigman2/quotes/204332491/composite MJ -5.46% allow investors to buy into the nascent marijuana industry, while others embrace companies that have pledged to take a “conscious” approach to capitalism, for example.
Nadig’s forecast of a 2024 “cross-over” date for ETF assets to top those of mutual funds has an important caveat. Right now, nearly all flows going into mutual funds are funding retirement plans. If ETFs were to replace, or coexist with, mutual funds in retirement offerings, that target date could arrive even earlier.
In an interview with MarketWatch, Nadig called 401(k)s “this giant pot of gold that the industry hasn’t been able to crack.” But the stars may be aligned for that to change. Big brokerages like Charles Schwab /zigman2/quotes/201281754/composite SCHW -5.17% have started to allow for the purchase of fractional shares of ETFs , allowing small-dollar, regular purchases of those funds in the same way mutual funds now pick up flows from every paycheck.