The Exchange Traded Fund Landscape: Past, Present, and Future

Exchange-traded funds (ETFs) have revolutionized the investment universe since their inception in 1993. They are indubitably one of the most successful investment structures in history. Their transparency, transactional superiority, tight arbitrage-based pricing, tax efficiency, and low fees are all contributing factors to their success. The authors expect their growth to continue at the expense of both mutual funds and other structured products, particularly as regulatory constraints are removed. ETFs are more difficult to operate when the underlying isn't transactionally liquid or easily valued. For this reason, the authors don't expect all ETFs to be successful. ETFs that use derivatives as underlying possess some unattractive characteristics that need to be thoroughly understood by investors. ETFs based on thematic strategies are often driven more by investor exploitation than sound investment thesis and will continue to underperform. This underperformance creates opposing dynamics in terms of both fees and assets under management. In this article, the authors offer an overview of the current ETF market, particularly focusing on recent developments in this area.