Top ETF stories of 2014—and what they mean for 2015

ETFs have dominated headlines this year - what about next?

December 31, 2014

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newport beach PIMCOFour years ago, when I started writing this blog, it was tough to dig up newsworthy and interesting exchange-traded fund (ETF) items to write about every week—and it was even harder to find meaty and relevant data on how and why institutions are using them.

My how things have changed. ETFs have often dominated the investment headlines in 2014, with media and researchers alike pointing to ETF flows in order to track investor sentiment about an ever-growing set of global markets and an increasingly diverse range of investment products. In many ways, 2014 was the year ETFs became more firmly rooted in the investor establishment via some of the biggest stories of the year. In this post, I’ve rounded up some of the top ETF developments in 2014 covered by this blog and what they could mean for 2015 and beyond.

Bill Gross leaves PIMCO – In 2014, we learned a big lesson about the dangers of star power in the investment industry. Bill Gross’s epic departure from bond giant Pimco, the firm he founded, rocked the bond market as investors played musical chairs with their money, pulling it out of PIMCO products and pumping it back into bond ETFs, which experienced  a massive influx in the week after Gross crossed the street to PIMCO’s competitor Janus. The lesson? Fixed income ETFs are now at the nexus of the bond market and have become a major indicator of investor sentiment and activity. As that happens, we need to think about how the liquidity promise of ETFs applies to a market that isn’t all that liquid—especially when investors move their money in and out en masse.

Exchange-traded mutual funds – For the past couple of years, ETF providers in the U.S. have been trying hard to make gains on the behemoth that is the mutual fund industry. To do this, they are seeking approval for products that don’t disclose their holdings daily, thereby blurring the boundaries between mutual funds that are able to exploit market opportunities and ETFs that are 100% transparent about their holdings day in and day out. Eaton Vance finally broke the mutual fund barrier with a proposal for a new product called an exchange-traded mutual fund—it won’t trade intraday and, like a mutual fund, it will be priced only once a day after the close. Products like this could see a lot of attention in 2015 and could be a game changer for the traditionally passive ETF world.

Malkiel updates his book – First published in 1973, Burton Malkiel’s iconic book Random Walk Down Wall Streethas raised questions about the value of active management—questions that have fueled the growth of low-cost ETFs that offer investors a transparent and liquid way to invest. Malkiel’s most recent edition of the book will include a chapter on ETFs, but he’s also concerned about the continued efforts of ETF providers to build products that look and feel more like active management. As new products continue to blur the lines between mutual funds and passive ETFs through smart beta and other factor-based approaches, Malkiel thinks investors need to keep their eyes open about what they’re getting when they invest in smart beta products—especially if they want to benefit from a truly random walk.

Institutional use grows – This has been a yearly trend since this blog’s beginnings. But 2014 marked a changing conversation between ETF providers and the institutions using them. Canada still lags behind, of course, with institutions in this country holding back on fully embracing ETFs compared to their global counterparts. Right now, ETF use is growing for Canada’s largest investors—with more than $5 billion in assets. But as the biggest investors jump in, smaller investors are likely to follow—and start using them more strategically.

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