Will ETFs eventually own all of the market?

In the second part of the series, WP reveals what happened when the founder and CEO of WisdomTree Jonathan Steinberg sat down for a Q&A with the CEO of Inside ETFs Matt Hougan.

Matt Hougan: Are the distribution choke points a threat to the core benefits of ETFs? One of the benefits people overlook in ETFs is that they dot around the charges that companies were layering on mutual funds. Recently those charges are coming back in. What do you think about the wires charging fees?

Jonathan Steinberg: You have to recognize that the distributor and the financial advisors have a customer, but one incredibly important difference is that this is coming out of our margin. These fees are not reducing the return of the end investor, so that’s a huge differential. This puts WisdomTree on a level playing field. We’ve done a distribution deal with TD which is leading to broader loads with more advisors and a stronger value proposition for the end customer. We’ve done distributions deals like this in Canada and Japan.

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Will every ETF provider become a model provider? Only if they have a broad enough suite of funds and the talent to negotiate deals. The deal with just did with TD was a very competitive type of negotiation and I’m not sure every provider has the head to do it.

Matt Hougan: What do you think will happen to the long tail ETF provider? Are they all going to get gobbled up, are they going to consolidated?

Jonathan Steinberg: We have something like 2,300 or 2,400 ETFs in the US and maybe 50% have less than $100 million in assets. So, if they were to all disappear today you would almost have no movement in AUM for the industry.

The hardest thing that has happened in the last decade is to take a new fund and scale it. It is incredibly competitive and it is hard to break through the clutter. My guess is…. I don’t know what value all these little funds from these little providers have if the buyer doesn't have the energy, DNA and talent to fight the war. Nobody is just giving you the money; you really have to work for it. So, I’m not sure what will happen with all of those.

Matt Hougan: Will traditional active ever rebound or will indexing and systematic strategies eventually own all of the market?

Jonathan Steinberg: The end customer does not care if there is a man or woman picking stocks if they are trying to buy alpha. They don’t care if it’s done by wolves or done by individuals. What they do care about is the wrapper. Unfortunately, for the world of traditional active, all of the money is in the less transparent less tax efficient, less liquid structures, and they charge you more.

In that format, they will never thrive. But fully transparent active has a huge opportunity, in fact everything that we’ve done in the past 12 or 13 years would fall into modern active, but in the better wrapper. The old wrapper will never regain its footing.

So, if you’re from the traditional mutual fund world today, will it ever get better for you? Not in that wrapper, no. The payphone is never making a comeback against the smartphone.


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