An Evolution of ETFs

Abstract

Around a decade ago, ETFs were mostly a novelty for investors. But in the past 10 years, ETFs have seen extraordinary rates of growth, and have expanded into more asset classes and sub-categories. We think 2006 provided a turning point, or evolution, of ETFs—from a cheaper beta product to a viable alpha tool. Many of the ETFs launched in 2006 closed previous gaps in asset allocation. It's now possible to build a multi-asset, diversified, tilted portfolio—with a currency overlay—just using ETFs. This article highlights the new wealth of choices for ETF investors, and discusses how investors could build a multi-asset portfolio including style, country, and sector tilts using ETFs. It also highlights recent ETF innovations covering different asset classes, allocating assets into commodity, currency, debt and equity; active strategies like currency harvesting, fundamental and quant stock selection or leveraged up and downside strategies; style and segment selection such as building positions in smaller, more customized industries and investment styles; and country selection and investing more selectively in overseas companies.