ETFs Won. Now What?

The New Phone Book's Here! The New Phone Book's Here!

Hey, I helped write a book! Actually, I helped revise the Comprehensive Guide to ETFs from the CFA Institute Research Foundation with my extremely smart and high-integrity co-author’s, Elisabeth Kashner, CFA (FactSet) and Joanne Hill (Bear Creek/Vest/CFA Institute).

Since their invention in the early ‘90s, ETFs have saved investors countless billions of dollars, helped them retire or pay for their kids education, and largely destroyed the access and quality difference between retail and institutional investors. ETFs winning is cause for celebration.

The book (DOWNLOAD NOW!) is completely free to the reader (a major reason I continue to work with the CFA Institute Research Foundation), and is designed to be somewhat definitive: it’s the baseline reality injection of what the modern ETF market actually is, warts, diamonds and all. What we just completed is Module 1 — the real nuts and bolts of ETFs and where they fit. Modules 2 and 3 — coming along nicely — will cover a framework for picking and choosing ETFs, and a nerdy run through the regulatory environment.

But not every thought about how things work belongs in a formal, quasi-academic guide to ETFs. I have thoughts. Here’s the quote:

ETFs didn’t just make investing cheaper and faster. Over 30-odd years, ETFs upended the entire old investment management apple cart. Since the 1990s, ETFs have taken an industry built on opacity, friction, and inefficiency and countered with transparency, speed and easy access. Today, ETFs dominate. But with dominance has come contradiction: radical transparency paired with deep misunderstanding, zero-fee products wrapped in hidden gatekeeping, democratization built on centralized control.
- Dave Nadig, Independent ETF Expert

ETFs won, and indeed, that’s a great thing. Now what?

The Old Way Was Rotten. Like Bad Food.

"Electronic trading replaced in-person trading and 'upstairs' market makers. The exchange-traded index fund was the right vehicle for the moment." — (p. 2)

"Mutual fund assets remain significantly larger than those of ETFs... but ETFs captured nearly all net new inflows over the past decade." — (p. 4–5)

This may be the most telling chart from the proto-book, and it’s one you’ve probably seen from the Investment Company Institute before: ((new ICI Factbook dropped today too!)

When I started in this biz (Bush the First) Wall Street was a sewer-maze of handshakes, favors, and hidden fat margins. It’s not that everything was a scam, it’s just that it was impossible to know whether everything was a scam. From the actual timing of tick-level quote delivery to getting IPO allocations, who you knew mattered a lot. Entering that environment, the ETF wasn’t just a new wrapper—it was a 1,000-year flood wiping clean the marketplace. The ensuing mutual fund apocalypse destroyed the old active management business, and despite the ongoing run of mutual fund conversions and coming (soon) share class issuance, there’s no going back.

Data Nugget:
48% of all US registered fund assets were passive by 2024, up from 19% in 2010​.

Fee Compression: Savior and Curse

"Investors use fees as a key criterion to select an ETF... Competition has driven the fees of the S&P 500 Index ETFs down to the low single digits or even zero." — (p. 6)

"The lower costs of investing in ETFs are also the result of competitive forces... [ETF issuers] have only a handful of 'customers' — the authorized participants." — (p. 5–6)

The headline story of ETF cost savings is completely true, but the easy wins are largely gone.