What Would Jack Bogle Think of Single-Stock ETFs?

For so long, even some of the largest active management shops held out, but they were beginning to suffer as a result. They no longer can afford not to offer the choice of ETFs to their investors.

We've seen late entrants make a meaningful splash in the space, like Capital Group and Dimensional Fund Advisors. AllianceBernstein launched their first ETFs earlier this year.

At the margin, increasingly, are niche, esoteric, oftentimes very volatile and sometimes super-gimmicky funds coming to market. They have no business [being] in most investors' portfolios. They're very risky in some cases.

Any other meaningful ETF trends?

Mutual funds are converting to ETFs. That can be challenging for a variety of technical reasons, so I don't think we'll ever see an actual rush to conversions.

Separately managed accounts are also now converting to ETFs in order to benefit from the tax-avoidance advantages of the wrapper and the way the securities move in and out of the portfolio.

Another trend is direct indexing, which is being offered by our asset management clients. When we think about life after mutual funds and the move toward ever-finer personalization in investing, today it's more personal than ever.

Direct indexing is emblematic of that: An investor, even individuals, can interact with a piece of software and tell it different things about their preferences and unique needs in order to shape the portfolio to meet those unique needs.

These may involve tax considerations, ESG preferences, certain outperformance-seeking signals.

You're going to continue to see adoption by a wide spectrum of firms.

Morningstar has just launched their own direct indexing capability. And there are a whole host of offerings that will be presented in the marketplace.

What's the scoop on single-stock ETFs?

Those would have been Jack Bogle's [founder of Vanguard Group and "father" of the index fund] worst nightmare. He wasn't a big fan of ETFs, though he came around a bit later in life.

Had he heard of the prospect of [a single-stock ETF], like the triple-levered Tesla up there on the risk spectrum — he would have blown a gasket.

But these have an interesting concept. They're emblematic of ETFs' possibilities because at the end of the day, an ETF is just a wrapper, a way to package exposure to a certain asset.

Think how transformational it was when the first-ever gold ETF [GLD] was listed in the U.S.

The single-stock phenomenon shows what the possibilities are. But just because it's possible, doesn't necessarily mean it's at all useful for the average investor.

Please talk about bond ETFs versus bond mutual funds.

In all cases, what [investors] are looking for is just a repackaging of different investment strategies — different slices and dices and juliennes of the market.

Bond ETFs are somewhat novel relative to bond mutual funds in that they trade on the stock exchange and provide a level of liquidity in bond markets, where investors can trade bonds back and forth just [because] bonds are repackaged in an equity wrapper.

So that [makes them] something that trades like a stock all day every day.

It really has had a huge impact on bond markets and how investors can trade, in some cases, very narrow segments of the bond market all day in these exchange-traded bond baskets.

That's a very different use case and a very different type of investor than you typically see in a bond mutual fund, who buy[s], hold[s] and rebalances.

The bond ETF has the ability to cater to a much wider investor base than bond mutual funds ever have or ever will.

How do you rate ETFs' tax efficiency this year?

Effectively, straight A's. When you look at their longer-term track record relative to mutual funds, they're much better from a tax point of view, which is obviously near and dear to a lot of investors' hearts: Every penny they keep away from Uncle Sam is a penny that compounds to their benefit over the long term.

Any other big ETF trends that you can forecast?

I expect that going into the future, actively managed ETFs will continue to be an area in which we see a lot of product development.

Asset managers will simply take strategies that they've offered to investors for decades in some cases and put that same strategy in a different wrapper that has benefits to the end investor — such as tax efficiency.

And oftentimes, the fees charged by the ETF wrapper are going to be lower relative to the mutual fund wrapper.

In many cases, advisors still have to pay ticket charges to transact a mutual fund, whereas ETFs generally trade commission-free.

So the path of least resistance right now points to the ETF for all parties involved, both asset managers as well as end investors.

Does your previous work as a Morgan Stanley financial advisor help you in your present job?

Absolutely. Sitting across from flesh-and-blood clients and hearing directly from them the biggest questions and challenges they were facing really taught me just how critical it is to tune out all this noise we're surrounded by day in and day out and really focus on the key things and signals that end investors need to know to set themselves up for success.

[Broadly] they need to ignore markets, they need someone they can work with that they can trust, and they need things presented to them in a way that's simple, transparent and that they can understand.