Nasdaq Trade Talks - ETFs in 2020 and Outlook for 2021

Jill Malandrino: Welcome to Nasdaq Trade Talks. I'm Jill Malandrino, Global Markets Reporter at Nasdaq. Joining me as part of our 2020 87th STA Annual Market Structure virtual conference to discuss lessons learned with ETFs in 2020 and outlook for 2021 is Anita Rausch, Head of Capital Markets at WisdomTree. Anita, it's great to see you. Welcome to Trade Talks.

Anita Rausch: Thank you. It's so nice to be here and so nice to see you virtually, Jill.

Jill Malandrino: Yeah. And, Anita, how did ETFs fair during the March-April volatility timeframe?

Anita Rausch: Well, I have to tell you, I love talking about ETFs during the March-April volatility, because they were such a success story. And the title of our talk today is, ETFs for Better or Worse, which is implying that ETFs are here to stay and therefore the better, as was just proven. ETFs are now pushing... Or ETPs, I'm sorry, are now pushing about $7 trillion globally, and they are firmly a part of everyone's financial toolbox.

And they proved their worth and their naysayers wrong during the pandemic when they acted as shock absorbers and liquidity lines. So, what that means is, when the underlying markets and equities and fixed income became stressed, the spreads might have widened in ETFs, but they still traded and at very heavy levels. So, during the height of the pandemic, of the volatility really, ETFs were trading at about 40% of the average overall equity volume. But they were a shock absorber and a pressure release valve in the respect that when there was no bid in, let's just say, the fixed income market and there was no buyer for some of the bonds, those ETFs that contain those bonds still traded.

So, the ETF market allowed investors to hedge, take positions, and continually do their investment strategies, even when the underlying markets were still frozen. Which is one thing I wanted to add is the proverbial stamp of approval for ETFs during this time period in the use of it on the government's balance sheet. So, the Treasury gave the fed money to stabilize the bond market, and one of the ways that the fed decides to do this was to invest in ETFs. And for the first time, the fed bought fixed income ETFs of about $8 billion of them. So, I would say that ETFs are now a very vetted and accepted structure.

Jill Malandrino: Now, issuers must be compliant by the end of the year with the ETF rule. How does that affect the markets and end investors?

Anita Rausch: Well, the ETF rule, I would say, in its simplest form is good for the end investors. It's providing more transparency into the ETF, more flexibility to the ETF provider, and it's ultimately going to tighten spreads and make it cheaper for the investors to buy and sell the ETFs. So, we look to become compliant with the ETF rule sometime this month. And with that, we have added basket and additional bid-ask spread disclosures on our website. But then, we're able to participate in custom baskets when creating and redeeming, and we're also able to make a creation unit smaller.

So, all this happens, though, behind the scenes, and this just helps market-makers manage the balance sheets better, which saves them money and then ends up tightening spreads. But the custom basket ability also gives ETF issuers more flexibility, and it allows the ETF to become even more efficient than it already is.

But most importantly... Well, not most importantly, but at the forefront of the rule is that it reduces the barrier to entry for ETF issuers by not requiring individual exemptive relief. And so what that means is that there's going to be more ETFs coming to market. You're going to have a lot more asset managers converting mutual funds into ETF structure. And at the end of the day, tighter spreads and more competition and more choices are going to be better for the end investor.

Jill Malandrino: What are we looking out for in the ETF world in 2021?

Anita Rausch: You know what? I've been in the ETF industry for 20 years and every year, I have been able to say that it's a growth industry. And I think that's still what I'm going to say, especially for 2021. So I see continued growth in the ETF industry because of the ETF rule, because of the continued education around the structure, as well as the changes to the trading fees at most retail brokers, meaning it's now free to trade ETFs at most retail brokers houses now.

So, there's a lot more adoption in use of ETFs in all channels of the clients. But let's just put it into perspective, because ETFs are still a small fraction of the index universe. In the US, they're approaching $5 trillion, but the mutual fund assets in the US were over 20 trillion last year. So, the growth of ETFs, they still have a long way to go.

And another thing that I would view next year would be automation and electronification in the fixed income markets. So, ETFs are providing a transparent view into an otherwise over-the-counter markets. And now we're all talking about what efficiencies and transparencies the fixed income market can evolve into.

Jill Malandrino: And, Anita, let's talk about the industry overall. Now that we understand what it's like to operate virtually, do you think once it's safe to go back to the office and to the trading desks, a virtual component will still exist or at least will have more of a hybrid environment?

Anita Rausch: Yeah, I actually really do. Firstly, it took me a long time to understand the depth and length of the pandemic. But I do think that it's going to take more time to get back to the office than we think, but I definitely think that it's going to be a hybrid environment. Firstly, I'd like to say that I'm so incredibly impressed with the industry and how we all were able to mobilize ourselves, our livelihoods, and our families to a virtual environment within two weeks of tremendous volatility with barely missing a beat.

So, productivity from home is certainly there, but I do think there's an apprenticeship nature to our industry and an osmosis that happens from sitting next to someone or having a casual conversation or going out for coffee. And that said, many trading desks are actually back in the office, while sales and other functionalities are coming back on a periodic rotation at some of the banks.

So I do think there is definitely a need to meet in person periodically, but I think that the hybrid model is definitely the most likely outcome because you're going to get the best of both worlds, savings on a real estate footprint, a quality of life, and then the innovation, and then the innovation from collaboration.

Jill Malandrino: All right, Anita, great to have you on Trade Talks. Thanks for joining.

Anita Rausch: Thank you.

Jill Malandrino: And thanks for joining me. I'm Jill Malandrino, Global Markets Reporter at Nasdaq.