Last week in the Wall Street Journal, writer Mike Foster compared the rapid rise of ETFs to the advent of digital downloads in the music business—they’ve revolutionized the investment industry but they’ve also put the spotlight on how its run (i.e. the fees charged). Foster’s comparison of ETFs to digital downloads is timely—with talk of bubbles and growing regulatory scrutiny, will ETFs be cast as a Napster-like bad boy on the block? Or will they be more like Apple and challenge the old guard of the investment world to innovate and deliver better products to investors?
Right now ETFs appear to be somewhere in between. Like Mac converts, ETF investors are passionate about them—they’re liquid and easy to use and, at least on the retail side, they are far cheaper than actively managed mutual funds. But regulators and other ETF providers are warning about the proliferation of some leveraged exchange-traded products veering far away from the simple roots of ETFs as index products. Call it too much of a good thing that could shake the confidence of investors and regulators alike.
Much will depend on how the ETF industry handles investors’ voracious appetite for their products in the coming year or two. According to the latest report from BlackRock, the market is now worth $1.71 trillion—a huge jump from $1.48 trillion at the beginning of 2011.
As the industry grows, it needs to play the game with regulators in order to remain a transparent and liquid way for investors to access markets when and where they want. Doing that will help them walk the line between industry renegade and innovator in the years ahead.