While other financial products and tools have sputtered over the past few years, ETFs have seen an explosive growth since their debut just over a decade ago – and are gaining an increasing foothold in the DC market, with more innovation on the horizon.
Panelists at Tuesday's Center For Due Diligence conference in Chicago offered a bit of insight into the meteoric growth of ETFs in the defined contribution market, plus their predictions for continued opportunities.
The basic truth, said Greg Porteous, head of DC Intermediary Relationships for BlackRock, is that ETFs can indeed provide a more stable solution for participant investments, though many of those future retirees still remain in the dark about the products.
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"Unfortunately, a lot of investors still think it's a stock, when it actually has the same restrictions and protections as a mutual fund," he said.
And what has made ETFs so successful? Porteous noted that the ETF space has grown to more than $1.6 trillion since the product's development in 2000.
"Much of the appeal comes from the fact that they can provide index-based returns, and provide benchmarked returns," he said. "They really can and do help manage risk, and they're a transparent instrument. Investors are able to save more and spend less, and build more efficient portfolios."
BlackRock's own involvement in ETFs in the DC space dates back to 2007 and now includes $6.5 billion in holdings; Porteous credits a reduction in plan costs as one of the major incentives for expansion into ETF holdings.
Porteous says he sees recordkeepers also gradually making a move into the product.
"The adoption of recordkeepers has really taken off and now we've seen a 100 or so that can work with ETFs and really make them feel and work like a mutual fund," he said. "The plumbing is getting there, finally. I just think that nobody would advocate a 100 percent ETF allocation."
Meanwhile, a new, all-ETF-based retirement platform offering from Charles Schwab Investment Management, set to debut in 2013, has many advisors waiting in anticipation.
Brian Pietrangelo, director of Schwab's Retirement Investment Services, said his company's 12 product launches in 2012 alone has helped push its ETF account totals to $72 billion. It's part of a product evolution that has helped mirror well with DC plan needs, he adds.
"There's a legacy history with ETFs, especially with plan sponsors moving in a more passive money management direction," Pietrangelo noted. "Still, most people don't understand how ETFs work and how there's no risk."
For more aggressive and sophisticated participant investors, Schwab is also exploring the ability to let them make intraday trades as part of their investment planning.
Tim McCabe, Sr., VP of Station Money Management, said ETFs have proven to be a cost-effective way for his firm to invest, something that's worked out well in just a few years.
"ETFs have been a godsend to us, with their low costs and they way they allow us to buy any sector," he said. "They've been very easy for us to adopt into. The key for us is that absolute transparency. Because they're made of multiple securities, that takes away the security risk. It's really a no-brainer."
Mark Temple, and advisor with Retirement Benefit Partners, said his company needed a more efficient way to run its business and has found ETFs to be a welcome opportunity.
"We also see them as useful in taking a passive approach, especially as there's been a shift in tactics related to fee disclosure and bottom-line pricing," he said. "ETFs are intuitive, and they've put us in a position to lower overall plan costs to a point where we could actually ask for a raise. I can tell you emphatically, the marketplace has grabbed hold of these products."
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