Practical Applications of Active Indexing with ETFs: Disruption and Implications

Practical Applications Summary In Active Indexing with ETFs: Disruption and Implications, from the Summer 2019 issue of The Journal of Index Investing, Joanne M. Hill of CboeVest discusses how exchange-traded funds (ETFs) have revolutionized the asset management, trading, and exchange businesses, and how investment professionals should respond. According to Hill, the proliferation, transparency, and cost/performance benefit of ETFs give investors greater choice, ease, and value. But at the same time, their wide availability and use of quantitative rules-based strategies are disrupting traditional asset management. Hill asserts that the strong relative performance of ETFs is causing investors to increasingly eschew traditional discretionary money management based on qualitative stock selection. Additionally, index firms—which provide the benchmarks for ETFs—are gaining influence in the development and marketing of investment products. Hill argues that the move toward rules-based, smart-beta investing means active management via ETF indexing will become more common as a trading strategy and in portfolio management, presenting a challenge to asset managers and financial markets. She advises ETF sponsors to apply new approaches to the content, marketing, and distribution of their products, and to train their sales forces to capably inform customers about all aspects of ETFs.