The Future of ETFs: A Backward Glance

Abstract

The next wave of ETF innovation will expand the investment opportunity set, reduce investment costs, and nudge the efficient frontier northwest. We can see this future in the rearview mirror. It is the history of the fund industry. The authors review a framework for evaluating investment innovation and assessing its contribution to “investor welfare,” a measure of investors’ ability to build portfolios that reflect their preferences. The authors also discuss opportunities for innovation and the technological and regulatory developments that could bring them to the marketplace.

TOPICS: Exchange-traded funds and applications, mutual funds/passive investing/indexing, mutual fund performance

Key Findings

• • The mutual and ETF industry’s history is its roadmap to the future.

• • As in the past, the industry will use advances in investment theory and new technologies to nudge the efficient frontier northwest, improving risk-adjusted returns.

• • These innovations will give investors the ability to build portfolios that more accurately reflect their preferences, enhancing “investor welfare.”