The news came out last week: when it comes to assets under management, exchange-traded funds (ETFs) are overtaking hedge funds, and at a rapid clip. According to London-based research firm, ETFGI, ETF assets have climbed to US$2.93 trillion – just shy of the US$2.94 trillion invested globally in hedge funds.
As ETFs look to best their hedge fund counterparts in the coming months and years, however, it’s worth noting that the two are alike in one other important way.
Today ETFs face a lot of the challenges hedge funds did just a decade ago when it comes to penetrating the pension space.
Back in the early 2000s, hedge funds were well ensconced in the portfolios of wealthy investors, foundations, and endowments. But hedge fund-specific issues like fees, liquidity, and transparency kept plan sponsors at bay.
Much has changed since then – a growing number of pension funds are using hedge funds and the hedge fund industry is getting a lot better at handling plan sponsor concerns around transparency and liquidity, especially post-crisis. In fact I just completed a story on this very topic for Benefits Canada (stay tuned for the June issue).
Here in Canada, however, ETFs are in the beginning stages of showing what they can do for the average pension plan. Sure, some of Canada’s biggest pension funds are using them, but it’s been harder for those plans that don’t do their own trading to effectively use ETFs from day-to-day.
ETF providers have also been working hard to educate not only plan sponsors but the consultants who are in many ways a first stop for plans seeking to explore new strategies and investments.
The ETF landscape is changing, however. Smart beta and factor-based strategies are gaining ground in the pension space and with that comes an opening up new territory for ETF providers to show their wares.
ETF costs are also coming down and, according to a presentation at last week’s Benefts Canada Benefits and Pension Summit, ETFs are gaining an edge on the liquidity front. As Marlene Puffer, partner with Alignvest Investment Management, noted, daily liquidity is a bonus for plan sponsors and ETFs can deliver it at lower and lower costs: “The cost of ETFs is lower, particularly the passively managed ETFs.” ETFs have become commoditized…They provide inexpensive, efficient exposure to the marketplace,” she explained. They can also give investors access to investments that investors wouldn’t otherwise get exposure to.
So, as with hedge funds, ETFs are following the education path and slowly making their case among the institutions considering using them. As their assets grow, it’s worth taking stock of how far they’ve come and where they could go in future.