As the ETF industry in the US finally crossed the $1 trillion mark, a big milestone, the question has turned to where the next trillion is going to come from. And there is no shortage of potential answers to that question because the pace of innovation in the ETF space continues to be rapid. More and more new ideas come to market and they get instant feedback in the form of investor dollars that either flow in or stay out of those new products. Lee Kranefuss, ex-CEO of iShares, spoke to Olivier Ludwig at IndexUniverse.com in a wide-ranging interview and singled out actively-managed ETFs as the area to look out for in the future.

Kranefuss talks about the democratizing nature of ETFs as investment options and the appeal that the ETF package holds for investors. “ETFs did something in addition to the inherent benefits of the ETF—i.e., the tax efficiency—they democratized the distribution of investment strategies”, says Kranefuss.

When Ludwig asks if he’s optimistic about Active ETFs taking off, especially considering the SEC’s reluctance, Kranefuss mentions that actively-managed ETFs have been in the works for a while now, close to 10 years and that a lot of industry players are continuing to hammer away at the issues that still need addressing. “Eventually, everything in the ETF industry is when, not if. It’s funny to me how long this has taken”, says Kranefuss. He proposes providing private equity exposure through an ETF as a possibility, something that provides private equity returns at a lower cost with much greater accessibility.

On the subject of transparency, Kranefuss adds that, “There’s very good reason not to be transparent. Because if you have an alpha strategy, there’s pickoff, and if people can see what you’re doing, they go copy it”. However, he also considers the alternative where an active manager has an alpha-producing investment thesis that goes against the grain enough to lead people to disbelieve it. In that case, they are comfortable being fully transparent.

Ultimately, ETFs could be used both for the beta component in portfolios as well as the alpha component, suggest Kranefuss. “Because the ETF provides ubiquity and because it tends to draw in the people who are freshly thinking, it will tend to be a distribution vehicle of choice”.

BlackRock iShares itself has come into the spotlight by filing with the SEC to launch actively-managed ETFs some time back. In fact, iShares has been one of the players that has been proactive in proposing new ways to bring Active ETFs to market, through variations around the disclosure requirements for these funds.
 

Written By Shishir Nigam from ActiveETFs | InFocus  Disclosure: No positions in above-mentioned names.

Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.

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