Supplements » ETF Report Sep 2021

ETF roundtable: A revolution in wealth creation

Funds Europe – Social media fuelled a recent surge in stock prices in companies such as GameStop and AMC Entertainment. What does this mean for issuers and should ETF issuers be concerned about retail-led market distortion?

Aviav – I take a bit of an issue with the question here. We’ve just seen one of the most impressive waves of wealth creation and disruptive innovation in this past decade with cryptoassets. Nearly all of the wealth based on that innovation was generated with little to no institutional participation. It was almost entirely retail-led, and it is still largely the same today with institutional adoption still lagging.

In the face of that most recent example, together with the relatively more retail-driven rally of the past year in equities, why would we assume that retail-led market movements are concerning distortions while market movements led by people with my resume lead to rational fair pricing?

It’s a challenging environment for financial professionals, but it’s only going to get more challenging for us as the retail crowd, which has a somewhat different mindset and viewpoint to most financial professionals, increases its impact over markets. This isn’t just about short-term volatility spurts – it’s a long-term trend. You would expect to see the retail investor have more and more impact on the markets as we move through time and finance becomes increasingly democratised and disintermediated.

What does this mean for asset managers? To survive, businesses will need to come up with solutions that clients themselves value, not the ones we think from our ivory tower that they should be investing in. We will need to innovate and we will need to remove barriers to innovation that exist today.

Sanguinetti – What we’ve seen is that these days are the first time anyone can access so many different types of investments at just the touch of a button. More specifically, the newer generations are learning faster on how to invest and they are a lot more financially literate. They want to be involved in the game. So, GME and AMC were just signs of unrest, they were just traders saying, ‘We want to be taken seriously.’ ETFs are such a powerful tool to democratise investing: there is a real opportunity here to welcome this new category of traders or investors and work on inclusivity rather than rejecting or belittling them. Instead of seeing this as retail versus institutional, can we not find a way to say, ‘These are also educated traders, they should be served the same way that institutions have been served for ages.’

Baccash – Is this trend going to continue? Will the asset manager base be trying to find solutions for it, creating products that would allow people not just to do it on their own but go in through an investor vehicle, and what type of data and information do they need back from it? Also, how will the regulatory environment evolve? How will that be, and will there be some sort of exception for asset managers if they have exposure to a position that’s in this situation?? Is there the need for some sort of discretionary rebalancing at a certain point? It was obviously disruptive, it dominated the financial airwaves and news cycle, so is that a one-off event or is it an event that will occur more and more that will lead to a trend that will lead to disruption which will lead to the need for further innovation? I think these are all questions that we will need to examine as an industry and make sure we have the infrastructure and innovation to adapt.

Redding – The key to this longer term is how the regulators look at it. In the US especially, the number of Congressional hearings that have already discussed it show how it’s going to be a priority for the new administration’s SEC [Securities and Exchange Commission]. That will have a long-term effect and impact on market structure, things like payment for order flow. People also probably didn’t realise that some of the brokerage firms in the US put restrictions on trading GameStop, and yet you can still trade it in Frankfurt. It will have global implications before it’s all over.

ETFs democratised the market more than pretty much anything – in personal finance, anyway – in the last ten or 20 years. Think about some of us that have been around for a very long time, the thought of investing in asset classes in an easy vehicle like an ETF, put in a wrapper of an ETF, individual investors have access to emerging markets and emerging market fixed income, which was unheard of 15 years ago, or commodities, also unheard of. That to me is the bigger democratisation story that all of us have lived through for so long. Take a little step back, that to me is the true beauty of what ETFs really have brought to the market.

Kooij – The idiosyncratic risk of the market has obviously increased a lot as a result of this, and having run money in the past, we would have always looked out for these sorts of issues, like checking short interest if you’re going to short on a name. There’s no limit to the sources that you can generally check in order to see that you’re taking into account all the risks of the volatility. You’re going to need to make sure there’s someone checking out these boards to make sure that you’re not going to be in a trade that the rest of the market’s in for one reason and you’re in for a completely different one, but that’s just active management 101.