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'ETFs as Asset Class' Is Among the Top 2019 Trends in the Market

By Sarah Ponczek and Vildana Hajric
(Bloomberg) -- Wall Street’s going to have to adjust its
business to account for a not-so-new but fast growing asset
class: exchange-traded funds.
Treating ETFs as a class of assets independent from stocks
is among the nine biggest market structure trends for 2019,
according to a report from Greenwich Associates Wednesday. It’s
testament to just how popular these tradable portfolios have
become -- and how increasingly important they are to global
financial markets.
“The last two years have really seen ETFs come into their
own as a tool for institutional portfolios,” Kevin McPartland,
managing director at Greenwich Associates and one of the authors
of the report, said in an interview. “Now it’s time to think
about how can we do this better.”
ETFs took in more than $310 billion in 2018, down about 33
percent from 2017 but still the second best performance in the
past dozen years, Bloomberg Intelligence data show. And while
mutual funds have recently seen redemptions, ETFs continue to
rake in cash.
Although ETFs trade like stocks, the authors of the
Greenwich report believe that investors need to stop treating
the two as if they’re the same. For example, increasingly
popular bond ETFs shouldn’t be evaluated as if they’re a single
stock. So industry evolution is necessary. To keep up, investors
will need trading algorithms, transaction cost analytics and
other tools to optimize portfolios.
“You wouldn’t trade IBM the same way you’d trade a basket
of bonds,” McPartland said. “It’s not looking at the right
market factors, it’s not taking into account the underlying
value of the basket of bonds. The market is really starting to
accept that fact -- that they’re not stocks and should be traded
on the fundamentals or makeup of underlying portfolios, and that
tools should be developed to do just that.”
It’s crucial for Wall Street to adapt because ETFs are
increasingly at the center of market activity. And with the
volatility of 2018 likely to continue this year, investors will
need all the help they can get in assessing how well these funds
can withstand turmoil after a long stretch of relative
tranquility.
“This will be a good test for a variety of things over the
last decade,” McPartland said. “How will they stand up to market
shocks? And some of the early trading tools that have been
developed, will they perform as expected under tougher market
conditions?”

 

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