Jim Ross tackles some of the ETF industry’s biggest issues

Deborah Fuhr Hi, I’m Deborah Fuhr with ETF TV. Today, I’m excited to welcome Jim Ross to talk to us about his assessment of where the ETF industry is today and an outlook on some of the future trends. Jim comes to us, having just stepped down from State Street after 20 years, where he was the EVP and chairman of the global SPDR business. He was also part of the Board of Governors for ICI for nine years, and he was the chairman of ICI’s ETF Committee for 10 years, so welcome, Jim.

Jim Ross Thanks, Deb, happy to be here today.

Deborah Fuhr How do you think the ETF industry is doing today?

Jim Ross I think the industry continues to grow. I think you can really see new pockets of industry. I mean, obviously, we’ve seen the emergence of ESG. Even since I’ve left you’ve seen non-transparent ETFs come to market. So I think you seen a lot of excitement, a lot of different things. And I think you can clearly see growth, which is what you want to see, especially ETFs have been used during the volatile markets, and I think we’ve seen some really positive uses there.

Deborah Fuhr Let’s start with ESG. Many people, especially in the US, think that, that’s a passing fad. What do you think about ESG?

Jim Ross So I don’t think it’s a passing fad. If you look at the institutional investment world around the globe, it has been a trend for a number of years. And I think using ESG factors to evaluate companies is something you’re going to continue to see. I worry that trying to package ESG into an ETF is broadly based. It’s going to have its challenges because everyone will look at the ESG differently. Even the chairman of the FCC has come out and said, ‘I get the E, I get the S, I get the G, I don’t know why you’re putting them together.’

Deborah Fuhr Yeah, and I think data is going to be a big challenge in terms of how do you get it? How do you clean it? So, consistency. Where do you see opportunity for active management today?

Jim Ross Listen, I think there’s always an opportunity for active management. Most of our clients using our ETFs are using them for an active outcome. So I don’t look at active vs passive, I look at how are you trying to improve your active performance. Some people try to do it by buying stocks and bonds. Some people want to try a little bit getting the right asset allocation and implementing through a low cost ETF, which definitely makes sense if that’s the approach they want to take. But active is there without any question.

Deborah Fuhr Totally agree with you. Moving on from that, the whole landscape of this new thing, non-transparent, active. So I don’t like the name, because it makes it sound like they’re never going to tell you what’s inside of them, which is confusing. But what do you think is driving that development and where do you see it going?

Jim Ross Semi-transparent is a better word, I’m with you, and I’ve been corrected many times from the folks who bring those products, but the active portfolio managers do not like disclosing when they’re trading in stocks or bonds, and frankly, more in stocks and bonds because there’s been transparent, active fixed income products out there for years that have been very successful, TOTLs are a good example. But I think in the small cap equity world and the international equity world, portfolio managers are reticent to tell people what they’re doing for very good reasons. And I think this gives them the opportunity to offer really, really well known products with the ability to not have to tell you immediately what they’re doing from a trading perspective. I think that is beneficial and will bring more of the active managers into this space.

Deborah Fuhr And that’s partially driven, especially in the US, by the fact that ETFs are more tax efficient than mutual funds. Right?

Jim Ross Thanks for a tax question, I also think it’s the way many investors prefer to invest today. Being able to buy it and access it through an exchange vs buying it through a mutual fund. If it’s not beneficial, if you’re a financial advisor and everything else you’re doing is through an exchange traded product, you much prefer that approach.

Deborah Fuhr And I think some of the recent changes around fees have driven more financial advisors to look at ETFs. We’ve seen the move to zero commission and lower fees for ETFs. How do you see that playing out?

Jim Ross I think you will continue to see growth of ETF because the ability to access them at really low cost and people have not really worried about this. ‘Geez, I made a mistake buying those two weeks. I want to sell it.’ There’s probably a market impact cost of it, but the cost of it from a commission standpoint is zero. I worry a little bit about zero because it definitely could get you into bad habits.

Deborah Fuhr And were you surprised when the Fed stepped in to start buying investment grade and high yield bond ETFs?

Jim Ross I wasn’t. When you think about what they want to do and what they’re trying to do as far as trying to stabilize the markets, one of the best ways to access that broad swath of bond is to do it through an ETF structure. I was surprised because I think there’s a political aspect of it that people might think of differently, but I wasn’t surprised, because I think it’s actually the right vehicle for them trying to accomplish. In a very straightforward manner what they’re trying to accomplish, which is buying an ETF to show a confidence in the market, but also just to kind of calm the markets down and show liquidity.

Deborah Fuhr One of the topics that has been out there for a long time is how are we best defining ETFs? So the categorization of ETFs, do you have any thoughts on that?

Jim Ross You know, there’s obviously a lot of things out there today. I know there’s been a proposal to categorize them in one way. I think it’s really hard. I think it’s hard to, I think some people view that proposal as good and a lot of firms signed on it, including my former firm. I always had some challenges with it, to be honest with you. I had written a white paper to the SEC, a comment letter that was more focused on characteristics, but that has its own challenges as trying to define the characteristics. I think in the end, the investor has to do their own due diligence. But I worry a little bit that a classification system today isn’t going to meet the needs of ETFs that might launch tomorrow. And that’s really my biggest concern. And I worry, too, that if it’s all within a quote unquote, 40X structure, it’s a classification system in itself, picking winners and losers. That’s not what you want in a classification system.

Deborah Fuhr Yeah, I would agree with you. Where do you see the biggest opportunities for the industry going forward?

Jim Ross You know, I think it’s continuing to go to the corners of the market where the investors are looking for product. You see a lot of new things coming out today, trying to get time to find and buffer to find ETFs. I think there’s a lot of interesting things coming up. I really continue to make sure you bring in good products to the investors at a reasonable cost that can help them solve their investment challenges. That’s what you want to be. And in order for that to be continually successful, you need to continue to educate investors on ETFs, because I thought we solved it 15 years ago by launching a couple of neat little things on SPDR University, and then I realized that it’s a necessity.

Deborah Fuhr And although this ends your chapter with the ETF, maybe you could just share with us what are you doing, because you’re not just sitting on a beach?

Jim Ross No, I’m not just sitting on a beach. So I became the non-executive chairman of Fusion Acquisition Corp. We’re focused on the asset well in FinTech space, which really kind of the background experience of our team, and we’re really trying to identify potential targets there that we think would be great for bringing public and get the benefit of a public listing and frankly, continue to run that company. We’re not not looking to step in and run the place, trust me.

Deborah Fuhr Well, that’s exciting. I look forward to hearing more news. It’s been great to catch up with you today, Jim. Thank you.

Jim Ross Thanks very much for having me. I really appreciate it.

Deborah Fuhr That’s it for this episode of ETF TV. For more episodes, go to ETFTV.NET, and look forward to catching up again.

Published on September 7, 2020