Volume reports for the volatile months of September and October support the claim. In September, ETF trading volume reached record highs, accounting for as much as 40 percent of total U.S. market trading volume, up from a daily average of 28 percent for much of 2008. By October the figure had retreated somewhat, hovering at 35 percent, according to the National Stock Exchange. Still, representing a third of stock trades is no small feat-particularly for an investment vehicle that barely registered on investors’ radar screens a scant five years ago. ETFs-or funds that track an index, but can be traded like a stock-are a relative newcomer to the trading block, debuting in the U.S. market in 1993.
Of course, volume rises when investors flee a vehicle, but that’s not the case here, says Kranefuss, 47, who reports that by the end of September equity mutual funds had seen outflows of $71 billion year-to-date while ETFs reported inflows of more than $89 billion. “In times of volatility, people value even more the ability to have broad diversification, to move quickly, to know what they are holding and to know how much they are paying without having to wait until the end of the day,” he says. “People are voting with their dollars.”
While not quite gloating, there is a definite note of satisfaction-perhaps even vindication-from Kranefuss these days. “One of the claims of active management has always been, ï¿½ï¿½In times of trouble, we can avoid problems,'” he points out. “But to outperform the market, active managers try to load up on things that will do very well. And the flip side of that is if they load up on things that do very badly, you’re worse off.” What’s more, he notes, mutual funds don’t disclose their holdings until the end of a quarter- which means investors can get blindsided by an overweighting in, say, the financial sector. ETFs, by contrast, make holdings public on a daily basis, a valuable commodity now that transparency is suddenly highly prized. And finally, ETF fees are lower (30 basis points on average) than those of their mutual fund peers, which typically are in excess of 1 percent.
The ETF vs. mutual fund argument is one Kranefuss, who came to iShares shortly after BGI introduced its first ETF in 1996, has made many times over the last decade. Charged with building investor interest in the asset class and driving the development of new fund offerings, the Boston Consulting Group alum performed his task admirably. He spearheaded iShares’ growth from a handful of funds and $2 billion in assets in 2000 into the ETF behemoth it is today. iShares is currently the world leader in ETF funds, with 330 funds globally, assets in excess of $350 billion and 600 employees worldwide.
It may have helped that ETFs as a whole were winning favor with both investors and the financial journalists who make a living touting investments. Or possibly it was iShares, which took a near-evangelical approach to promoting the low fee, broad diversification and trading flexibility ETFs offer to financial advisors and their clients, that helped the category as a whole.
“We have a joke internally that we’ve sold an awful lot of ETFs for our competitors- in some cases more than they have sold themselves,” says Kranefuss, with a laugh. “But that’s okay. It’s good to have competition in the marketplace and people want choice.”
These days ETF-hungry investors have plenty of that-there are now more than 1,499 ETFs available globally (681 in the U.S.), with 356 new launches in 2008 alone (through third quarter). ETFs now come in all sizes and flavors, including a wide range of commodity, fixed income and country-specific varieties. In fact, the flood of new entries has led to some criticism of fund managers’ propensity for bringing out new iterations of existing funds. The gold rush mentality has also led to some winnowing of the field, with 42 funds liquidated in 2008 through the end of October.
Kranefuss, however, has no plans to consolidate. In fact, quite the contrary. “We are continuing to bring product out,” he says, noting that iShares is slower to market than some fund managers. “Because we’re in it for the long term and because parts of our clientele are large institutions and financial advisors, we have to make sure we’re building products that live up to the quality standards we’re comfortable with. In some cases, we would love to have [an iShares version] of some products on the market; we just can’t figure out how to do one quickly that would match our standards.”
Over time, Kranefuss sees the ETF industry expanding to the point where virtually every asset class-including currency, real estate and venture capital- is available in ETF form. “Why shouldn’t you be able to access any part of the market with one trade through any broker into any brokerage account?” he asks. “The answer is just engineering, figuring out how to get every investable asset class into an ETF. And there is a huge amount of effort going into that.”