As a new generation of young investors emerges, our expert panel discusses how ETFs could help drive radical changes in wealth creation. Plus: the future of crypto, ESG issues and more.
Rick Redding (Chief executive officer, Index Industry Association (IIA)
Jeffrey Baccash (Head of global ETF solutions, BNP Paribas Securities Services)
Roxane Sanguinetti (Head of fixed income ETF trading and investor relations, GHCO)
Fred Kooij (Chief investment officer, Tribe Impact Capital)
Rafi Aviav (Chief operating officer, WisdomTree Europe)
Funds Europe – Fixed income ETFs are thriving in Europe and have seen increasing demand over the last few years. What are the main developments/challenges in this space, and what more needs to be done for the market to reach full maturity?
Rick Redding, Index Industry Association – Fixed income indices grew much faster than equity indices in the most current year. In particular, ESG within fixed income grew dramatically, according to our annual survey. In general, ESG indexes grew by about 40% last year, which is phenomenal because typically the number of indexes increases by between 2% to 5% a year. In the ESG space, a lot of this is not just coming from Europe – it’s also coming from Asia-Pacific and the Americas – but clearly Europe is much further ahead here than the rest of the world.
Overall, we’re on the right path. As the number of transparent transactions increase with better-quality data, the indexes continue to get better and more accurate as there’s more data over time.
Jeffrey Baccash, BNP Paribas Securities Services – There is natural momentum. As you increase the maturity in the fixed income space, more people and participants throughout the ecosystem are getting increasingly comfortable with it. That allows for a natural growth pattern and that allows different players to understand what needs to be done from those initial stages, which makes products more efficient. The price discovery aspect is improving and has become more important, which allows for funds to act more efficiently. We’ve seen the benefits of a fixed income ETF when you’ve had some market crunch, because by people placing their thoughts on the price of the ETF, it’s giving way to what’s going on inside the portfolio as well. As the natural momentum continues to grow, there will be more price discovery leading to wider adoption.
Roxane Sanguinetti, GHCO – The European market is still a lot less mature than in the US and more fragmented, so it needs support from people like us.
As liquidity providers, something that we’ve noted is obviously the underlying fixed income market is extremely fragmented, it’s way behind in terms of automation and technology compared to the equities markets. In fixed income ETFs you can see sizeable dislocations between the ETFs and the underlying bonds. In Europe there are only a handful of firms that work on keeping bonds and ETFs in line with one another – we won’t reach maturity until we see more competition in the space.
Luckily, since what happened last year with the liquidity crunch, there is more trust in ETFs. We have demonstrated that the ETF is a more reliable product than the bonds themselves in terms of pricing.
Rafi Aviav, WisdomTree – ETFs are pretty mature at this stage. There are tons of asset classes and choices being offered to investors, they’ve shown their resilience in the past year in a way that most people did not necessarily predict, even their biggest advocates. But, similar to people, it’s just when you’re mature and confident that you can truly start to realise your full potential.
One of the most obvious challenges is that most fixed income ETFs today – probably over 95% of the assets – are plain market cap weighted indices, a much higher ratio than in equity indices, in spite of the fact that weighting securities in this way makes less sense in fixed income than it does in equities. You’re basically buying the most indebted companies, and the more debt they issue, the more you buy of them and the more you allocate to them in your portfolio. It’s hard to argue for that as an investment strategy, and it’s not a coincidence that in the core fixed income categories, active managers actually find it somewhat easier than their equity counterparts to outperform their benchmarks.
There is a place for more non-cap weighted fixed income ETFs, especially in the core categories.
Fred Kooij, Tribe Impact Capital – We need more innovation within the ETF world and more courage from providers to provide a product that is unconstrained. To have ETFs which are market cap weighted or based on something that is off an index which has already been reformed is worrying because it doesn’t mean there’s any opportunity as a retail investor or any type of ESG impact allocator to be able to know what type of intervention your capital is having.
In the equity space there are some really interesting ETFs being rolled out that aren’t so much passive vehicles, but quasi-active because the indices which the ETFs are being based on are companies which are being turned over more often, where there’s actually engagement with management teams. It’s not just all quantitative. If we’re going to be moving into a more interesting product set for the retail investor, especially one that has proper ESG, by which I really mean impact, we need a serious think about the underlying fundamentals.