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$70 Trillion Will Demand Open Platforms

Posted by Dan Weiskopf, ETF Professor on Oct 6, 2021 10:51:49 AM
Dan Weiskopf, ETF Professor
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Open Platforms Will Win the Investor Battle

It used to be “cool” to speak about the “ETF Revolution” as a means of democratizing investing. Early ETF adopters will recall that it was this philosophy that encouraged ETF evolution during the first phase of growth. Then came the second phase of growth, which involved lower fees and the beginning of platform constrains in 2008. Now, after a period of new closures in 2020, it is clear the evolution is again exploding with innovation through new listings. There have been 437 new ETF listings in the past 12 months, which is a 10.8% increase. Now, 2.88 ETFs are launched for every closure. Few understand why the change has so much momentum, but the answer may simply be that conditions have changed. Specifically, conditions have changed in terms of the influence from retail investors and a proliferation of open platforms. Additionally, investors have a greater desire to seek alpha via thematic targeted solutions that address diversification or high active share. Also, with the further shift in fixed income, investors are more open to alternative risk-based solutions.

Retail Stock Market Influence

The work-from-home lifestyle and the GIG Economy were growing trends way before Covid, but as we shift back towards normalcy, there is some permanence to these changed conditions. We agree that not all companies can be as effective when operating with a completely remote structure. But many young successful investors (retail) who feel empowered by newfound easy wealth are not likely to go back enthusiastically to their day job. Hopefully going broke will not be the solution! Trading can be intoxicating. Moreover, while markets will make all of us humbler, let us not forget the Hertz moment when every institution said there was no value in buying the stock - and it turns out retail was right. Retail was also right about AMC and countless other stocks. Retail has also been wrong, but in the future, we would expect individual investors to embrace more thematic ETFs and innovative solutions. We discussed this next chapter of innovation in the June 2020 Blog Post, Measuring ETF Innovation In The ETF Industry. It is easier to be an early adopter of an exciting new theme or sophisticated solution with your own money than when you are a fiduciary. Retail investors tend to demand alpha, while fiduciaries tend to manage risk. So, when 75% of thematic ETFs beat the S&P 500 in 2020,[i] it should not be unexpected that 2021 thematic ETFs would find momentum.

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Disruption From Proliferation of Open Platform Access

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The abundance of open platform trends has the potential to disrupt the future evolution of investor platforms as facilitators of a $70-trillion-dollar wealth. Over the coming weeks, we plan to explore this development further. But for now, investors should think about the limitations that exist in having their assets compiled on one platform. Access to investment platforms is free, and with few barriers to entry beyond regulatory hurdles, these business models are quickly evolving beyond the traditional mix of investments. There are many reasons why Schwab acquired/merged with TD last year, but we will see in the near future how many reasons relate to innovation and client alignment. The compression on margins and the need for scale has been an issue since 1975, but few understand that competition based upon innovation will be the driving force in the future. The fact is that the younger generations, slated to inherit the $70 trillion dollars, are not likely to embrace the traditional restrictive structure and platforms. Not when the world of investments is so lucrative, fast paced, and easy!

Platform change needs to be embraced! Old timers may remember May 1, 1975, when the brokerage industry was changed forever with the deregulation of commission. For those not aware, prior to that day in 1975, people would pay their broker in 1/8ths and 1/4ths. A 25-cent-per-share commission on a 10,000-share trade would put a financial advisor in jail today.  (See link ‘May Day’ Forebodes Some Uncertainty for Wall Street) Why do we bring May Day up? Some forget that regulations are a force for positive change, and because the media continues to highlight the issue as front and center. Moreover, the complexity of regulations as fairness equalizers makes for potential intersection for platform innovation. In a factorized world where individual investors are viewed as clients, we see the trading activity of rewards points, personal liabilities (student loans, mortgages and business loans) and crypto offering innovative solutions that are aligned with personal needs. Open platforms should be the solution that is most desired by sophisticated investors. How are investor gates good for happy clients? Regulation does not have to prohibit innovation. In fact, regulations arguably create the path for the journey and are part of the reason why firms like Charles Schwab have flourished. Investors will go to where the puck is going, so platforms should do the same.

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Targeted ETFs Solve Different Problems

ETF solutions providing diversification, thematic, and alternative solutions can be a good investor path in 2022 and beyond, because they potentially solve different problems. Let’s face it – buying the market at this point should cost very little, and past performance of the traditional 60/40 model will not work in the future when conditions have changed. This trend is masked by the massive flows in cheap beta, but that KPI does not tell the full story of this next ETF evolution. There are 270 ETFs that qualify as thematic in the ETF Think Tank database, and assets are about $176 billion. There are 2,677 outstanding ETFs generating about $12 billion in trailing revenues, but the trend in active is accelerating since active brings a different set of solutions. Shocking as it may sound, there are 665 actively managed ETFs, and active as a category represents almost 10% of the revenues. These are amazing KPIs, considering that most investors and financial advisors still view ETFs as static portfolio solutions. (See KPI Link for details). This matters because those who still view such solutions that way are looking in the rear-view mirror, which will not work for their business, and certainly not for their clients. Conditions have changed! The younger investor base will demand open platforms. This young investor base is set to see the benefits of the largest transference of wealth ever. Stay tuned!!!!

Footnotes

[1] Eric Balchunas posts on twitter that 75% of the thematic ETF in 2020 beat the S&P500 https://twitter.com/EricBalchunas/status/1352242116618022915?s=20.

Additional relevant posts to this article by Eric Balchunas: https://twitter.com/ericbalchunas/status/1361667984293527552?lang=en

https://twitter.com/EricBalchunas/status/1352242116618022915?s=20

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