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11-11-2015, 04:27 PM
How exchange-traded funds have changed the financial world – for the better
Date November 11, 2015 - 4:50PM
Patrick Commins
Markets Deputy Editor
[Image: 1447221023096.jpg] Mark Wiedman, global head of BlackRock's iShares business, says the rise of ETFs is not to blame for heightened volatility in financial markets. Photo: Peter Braig
As banks have become less willing to act as shock absorbers in global bond markets, exchange-traded funds have become an important contributor to systemic stability, according to the global head of Blackrock's giant iShares business.
The claim by Mark Wiedman, who was recently in Australia to visit clients, comes amid increased chatter in the investment management community that the rise in popularity of the listed benchmark-tracking vehicles is exacerbating moments of extreme volatility in financial asset prices. Some have gone as far as claiming ETFs played an active role in inflating this year's bubble in Chinese mainland stocks.
"The danger is saying that because you can see something that is the cause, as opposed to illuminating what was opaque or dark before," he says.
It's no surprise to hear the head of the world's biggest ETF business laud the product as a force for good, or at least not a force for evil.
But Morningstar's resident ETF expert, Alex Prineas, is sympathetic to Wiedman's view.
"We've always had market volatility. What it really comes down to is when people start punting and start pushing lots of hot money into the market – that is what causes volatility," he says. He points out that around the turn of the century when ETFs weren't a big presence in the market, investors still managed to pump up and then blow up dotcom stocks.
"The fact is that ETFs are an efficient tool, and that's what people are choosing to use to invest with," he says.
Bond markets
Wiedman is dismissive of concerns that the bond market has become unstable due to the retreat, under regulatory pressure, of global investment banks from the role of middlemen in the buying and selling of fixed-interest securities.
"We don't believe there is going to be a significant disruption in the bond market due to illiquidity," he says. While there may be moments of "discontinuous pricing", there are "huge walls of money" from the likes of pension funds and insurance companies which are desperate for higher yielding long-term debt, and which will jump in and steady the market should prices move jarringly lower.
ETFs are also playing their part in filling the gap in the market left by the retreating bank middlemen.
"ETFs have created something that doesn't exist anywhere else in the bond market, which is a place for buyers and sellers to meet directly on an exchange and trade directly with each other, and leave the banks out of it," he says.
"ETFs are net contributors to systemic stability in the bond market, especially in corporate bonds."
Wiedman points to the extreme volatility on Wall Street on August 24, when iShares products that tracked the riskiest end of the corporate debt market – high yield, or junk bonds – had a record day.
Trading in iShares high-yield bond ETFs was $US1.4 billion ($2 billion), Wiedman says, or about 15 per cent of the overall US high-yield market.
"To give you sense of how significant that is, if you look at all the underlying trading on all the bonds on the index, it added to $1.2 billion that day. So more traded in the ETF than in the entire underlying market."
Under-used tool
Wiedman believes ETFs remain an under-used product globally – despite total assets under management for the industry now approaching $US3 trillion – and particularly among Australian retail investors as financial advisers move away from receiving commissions for recommending products.
"In every market, everywhere around the world, where there is significant opening up of fee-based pricing, ETFs inexorably grow," he says.
"Advisers get much more focused on the overall cost of the product."
"The [Australian] market should be four to five times bigger given how sophisticated and how big the super pool is here," he adds.
Robo advice
The biggest buzz term in the US financial services industry right now is "robo advice", or computer-generated advice.
"We had a conference with US distributors around their business models and the changing [competitive] landscape," Wiedman says.
"We polled them as to what they thought was going to happen and the vast majority, about 80 per cent, thought the spread of this robot technology" was the key issue for the future of the industry.
"In a world where you can get a serviceable asset allocation for free, a coherent, cleanly presented way of accessing that advice, at a low cost, sounds like a pretty winning proposition," Wiedman says, also pointing out that ETFs are an ideal way to execute an automated strategy.
"It doesn't mean it's the death of the adviser. The adviser has to move more upscale – or change the fee structure."
Date November 11, 2015 - 4:50PM
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Patrick Commins
Markets Deputy Editor
[Image: 1447221023096.jpg] Mark Wiedman, global head of BlackRock's iShares business, says the rise of ETFs is not to blame for heightened volatility in financial markets. Photo: Peter Braig
As banks have become less willing to act as shock absorbers in global bond markets, exchange-traded funds have become an important contributor to systemic stability, according to the global head of Blackrock's giant iShares business.
The claim by Mark Wiedman, who was recently in Australia to visit clients, comes amid increased chatter in the investment management community that the rise in popularity of the listed benchmark-tracking vehicles is exacerbating moments of extreme volatility in financial asset prices. Some have gone as far as claiming ETFs played an active role in inflating this year's bubble in Chinese mainland stocks.
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Ensconced in a meeting room in a Sydney skyscraper overlooking the harbour, Wiedman reaches for what you suspect is a well-worn metaphor: "If you open a closet door and turn the light on and you see cockroaches, you can blame the light if you want, but it's probably not the source of the disturbance.[url=http://www.smh.com.au/business/markets/how-exchangetraded-funds-have-changed-the-financial-world--for-the-better-20151111-gkwamk.html#][/url]
"The danger is saying that because you can see something that is the cause, as opposed to illuminating what was opaque or dark before," he says.
It's no surprise to hear the head of the world's biggest ETF business laud the product as a force for good, or at least not a force for evil.
But Morningstar's resident ETF expert, Alex Prineas, is sympathetic to Wiedman's view.
"We've always had market volatility. What it really comes down to is when people start punting and start pushing lots of hot money into the market – that is what causes volatility," he says. He points out that around the turn of the century when ETFs weren't a big presence in the market, investors still managed to pump up and then blow up dotcom stocks.
"The fact is that ETFs are an efficient tool, and that's what people are choosing to use to invest with," he says.
Bond markets
Wiedman is dismissive of concerns that the bond market has become unstable due to the retreat, under regulatory pressure, of global investment banks from the role of middlemen in the buying and selling of fixed-interest securities.
"We don't believe there is going to be a significant disruption in the bond market due to illiquidity," he says. While there may be moments of "discontinuous pricing", there are "huge walls of money" from the likes of pension funds and insurance companies which are desperate for higher yielding long-term debt, and which will jump in and steady the market should prices move jarringly lower.
ETFs are also playing their part in filling the gap in the market left by the retreating bank middlemen.
"ETFs have created something that doesn't exist anywhere else in the bond market, which is a place for buyers and sellers to meet directly on an exchange and trade directly with each other, and leave the banks out of it," he says.
"ETFs are net contributors to systemic stability in the bond market, especially in corporate bonds."
Wiedman points to the extreme volatility on Wall Street on August 24, when iShares products that tracked the riskiest end of the corporate debt market – high yield, or junk bonds – had a record day.
Trading in iShares high-yield bond ETFs was $US1.4 billion ($2 billion), Wiedman says, or about 15 per cent of the overall US high-yield market.
"To give you sense of how significant that is, if you look at all the underlying trading on all the bonds on the index, it added to $1.2 billion that day. So more traded in the ETF than in the entire underlying market."
Under-used tool
Wiedman believes ETFs remain an under-used product globally – despite total assets under management for the industry now approaching $US3 trillion – and particularly among Australian retail investors as financial advisers move away from receiving commissions for recommending products.
"In every market, everywhere around the world, where there is significant opening up of fee-based pricing, ETFs inexorably grow," he says.
"Advisers get much more focused on the overall cost of the product."
"The [Australian] market should be four to five times bigger given how sophisticated and how big the super pool is here," he adds.
Robo advice
The biggest buzz term in the US financial services industry right now is "robo advice", or computer-generated advice.
"We had a conference with US distributors around their business models and the changing [competitive] landscape," Wiedman says.
"We polled them as to what they thought was going to happen and the vast majority, about 80 per cent, thought the spread of this robot technology" was the key issue for the future of the industry.
"In a world where you can get a serviceable asset allocation for free, a coherent, cleanly presented way of accessing that advice, at a low cost, sounds like a pretty winning proposition," Wiedman says, also pointing out that ETFs are an ideal way to execute an automated strategy.
"It doesn't mean it's the death of the adviser. The adviser has to move more upscale – or change the fee structure."