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Better, faster, cheaper – why ETFs are so disruptive

12 September 2019 | Paul Jakubowski

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Exchange-traded funds (ETFs) are one of the most disruptive forces in investment management. They've gathered assets at a phenomenal rate. At just under US$5.5 trillion globally, they've doubled assets in less than five years1. But growth on its own doesn't make ETFs disruptive.

For me, disruption means three things. It means that you can do something better, faster and cheaper than before. 

ETFs have broadened market access to investors around the world. They give investors more options to invest and diversify.  That's better. Investors can gain broad, diversified exposure to a variety of asset classes. That could be a portfolio with all the stocks of the FTSE 100, the S&P 500 or one that covers multiple markets by tracking regional and global equity and bond indices.

ETFs are faster. They trade on an exchange, just like stocks and many bonds. With one transaction, an investor can buy the market. As an investment tool, they've made it easier and more efficient to access many markets and asset classes.

And they're cheaper. Like mutual funds, they minimise transaction costs and offer investors economies of scale. But, unlike mutual funds, the asset-weighted average expense ratio is 22 basis points for ETFs globally1. They're driving the cost of investing lower.

Applying the same criteria, it's easy to see why ETFs will continue to be disruptive for a long while to come.

Consider how ETFs can continue to get better. Right now, ETFs are dominated by index strategies.  Over the next five to ten years, we expect active strategies will be incorporated into the ETF market. Recent regulatory developments in the US have opened the door to wrapping traditional actively managed portfolios in exchange-traded funds. That will mean more options for investors and access to different investment strategies and styles than are currently available.

Let's talk about faster. As markets get more global and as more investors adopt ETFs, that's going to create more liquidity. As the market gets bigger, we can expect it to be more efficient. This should improve execution.

It should also make investing cheaper. At Vanguard, we're spending a lot of time and money investing in technology to help lower costs. How do we create better ETF baskets? How do we engage with the market more efficiently? How do we lower bid-ask spreads?

Our efforts should lead to better, faster and cheaper outcomes with regard to portfolio construction and risk management. But the real goal is to drive better, faster and cheaper outcomes for investors. That's what's disruptive about ETFs.

1 Source: ETFGI as at 30 June 2019.

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Important risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

Other important information:

This material is for professional investors as defined under the MiFID II Directive only. In Switzerland for institutional investors only. Not for public distribution.

This article is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The opinions expressed in this article are those of the author and individuals quoted and may not be representative of Vanguard Asset Management, Ltd or Vanguard Investments Switzerland GmbH.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority. In Switzerland, issued by Vanguard Investments Switzerland GmbH.

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