Morningstar ETF strategist Scott Burns got a promotion Monday to director of fund research for the Chicago-based firm, and will lead teams in the United States and Canada. But that didn’t stop him from sounding off about his first love, exchange-traded funds, at the company’s annual investment conference in the Windy City, running through Friday.
When asked about the widely held prediction that mass consolidation would occur in the ETF space, and if it’s yet happened, Burns responded, “There’s a certain level of creative destruction that never happened all at once in the mutual fund space. Creative destruction happens in the mutual fund space, but it can be masked easier by rolling closed funds into other funds, for instance. The rapid maturation of the ETF space meant that the creative destruction would be just as rapid—and more high profile.”
For those advisors that are looking to use mutual funds as straight trading substitutes, as opposed to those that want to use them as straight mutual fund substitutes, he said ETF companies will “keep their menu options open” and not consolidate, for the simple fact that the companies can’t predict what geographical market will hit when, “so they want to be ready for when Malaysia, for instance, decides to take off.”
So where are investors currently finding alpha in the ETF space?
“Investors are looking for broader solutions; those with exposure to global markets, as well as continued demand for alternative products,” he said. “You have two types of ETF products right now; the traditional structured products that came on the exchange, and then you have more of the ETF “tools” that are being developed. The ETF tools will never be part of a core portfolio. As it is often said, ETFs began as structured products that came on the market and they remain structured products on the market.”
He added active ETFs are also in demand, an area of considerable controversy when the product was first launched, with many critics claiming the index-based products couldn’t succeed in the active space. So have active ETFs proven themselves?
“Yes, and PIMCO’s Total Return ETF was proof of that,” Burns said, noting the bond fund giant's recent foray into ETFs. “The concept has arrived and proven itself. Many of the critics of active ETFs said they will be just like active mutual funds (which still have the lion’s share of mutual fund assets, by the way, even though passive strategies often outperform). I don’t think that’s the case with ETFs; active ETFs will take the best of the actively managed concept and leave the rest.”
As for his new role, the mutual fund research teams he will manage will be restructured into four areas: active management, passive management, fund of funds and alternative investments.
“The type of vehicle is really the second question investors should, and do, ask,” Burns said. “The first question is the appropriate strategy, and that’s why we’ve restructured in the way that we have. Individual investors are beginning to invest like institutional investors, in terms of the questions they’re asking and the quality of advice they’re seeking.”