Retirees, Active Management and MLPs: The Future of ETFs

What does the alternative income ETF investor look like?

Michael Iachini painted a portrait during Charles Schwab's monthly ETF conference call with media on Friday.

"The most common type of investor who might be interested in one of these alternative income, [master limited partnership] or otherwise, products is going to be an income investor, typically somebody in retirement," said Iachini, managing director of ETF research for Charles Schwab Investment Advisory. "They've built up their assets, they have a portfolio, now they need to turn it into living expenses — so that's where we tend to see the most need for income from that type of investor."

The other type of investor that Iachini describes is someone "who might be interested in something off the beaten path."

"Someone who is looking for further diversification, searching for something that might not move in lockstep with broad equity markets, especially in a market like we've seen in last couple weeks where things can get a little exciting," Iachini said. "I know a lot of investors are reminded of the power of diversifying so it doesn't move right in line with the S&P 500."

Iachini was joined by three other ETF professionals during the conference call – Bruno del Ama, co-founder and CEO of Global X Funds; Jeremy Held, senior vice president and director of research of ALPS; and Kenny Feng, president and CEO of Alerian — to discuss where they expect to see future innovation in the ETF space.

Active ETFs

Perhaps the biggest category of potential innovation and growth, according to del Ama, is within the active space.

"We've been seeing a lot of different providers filing for active ETFs [and] active management within the ETF fixed income space," del Ama said. "But a lot of active managers within the equity space are really concerned with the daily transparency of those positions, so there's been a number of publications with the commission for different solutions to solve for the daily liquidity and transparency."

If the daily transparency issue is solved, del Ama believes there could be a lot of trends in active equity ETFs space and a lot of growth through those sectors.

MLPs

Both Held and Feng agreed that ETF innovation in the MLP space should be expected — and part of that is due to investor interest.

"There's more than $15 billion now in the exchange-traded MLP business, and I think that's telling you that investors really have a desire to get access to this asset class," Held said, "and they were sort of waiting for a structure that was more liquid, more transparent, more cost effective and more easy for them to own."

Five years ago, Held added, investors interested in MLPs found it difficult to get access without tax complexity, liquidity obstacles, transparency and expense hurdles.

"By being able to deliver an exchange-traded fund that covers that asset class, you really open up MLPs to a much broader region of investors," he said.

One driver of that investor interest, Feng said, is the energy renaissance taking place in the United States.

"The investor market for MLPs is far more heterogeneous then has been the case at any point in its history … and we think that is going to drive continued innovation in the MLP space and the ETPs that track it," Feng said.

As Held said, innovation is the foundation upon which ETFs were built.

"You don't grow from 0 to $2 trillion in 20 years by trying to come up with the same solutions investors already have, whether it be through mutual fund or individual securities," he said. "What ETFs were really able to do was, it was either provide exposure to strategies or asset classes or investment themes that investors didn't have before or they were able to do it in a way that was simpler, more cost effective, more transparent, more liquid."

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