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ETFs Becoming the Investment Vehicle of Choice, Says Market Expert

Since its advent, exchange-traded funds (ETFs) have given the capital markets a dynamic investment vehicle that’s rivaled mutual funds. With the space only growing exponentially, the ETF will become the investment vehicle of choice, according to Stephanie Pierce – CEO of BNY Mellon Investment Management’s ETF and Index Business.

 

“I would actually say ETFs broadly have experienced phenomenal growth from a variety of those trends that you mentioned,” Pierce said in a Yahoo! Finance interview. “If you just look at the numbers today, ETFs represent over $4 trillion just in the US, and have just reached $7 trillion globally. So to your point, at the current rate, ETFs are set to outpace mutual fund assets, which have been around a lot longer, in just over three years. So we are seeing ETFs becoming the investment vehicle of choice for many investors, both at the advisor level, as well as retail and institutional clients.”

 

“Probably more important was that orderly trading of ETF markets actually enabled investors to manage their fixed income exposure, notwithstanding the inability to buy or sell individual fixed income securities. If you think about a functional fixed income market, most liquid corporate bonds trade approximately a dozen or maybe two dozen times a day,” Pierce added. “ETFs trade much more frequently. And so when you saw the liquidity issue in March, ETFs became the only tool of price discovery. So as an example, if an ETF were trading at a 5% discount to net asset value, that told you that the bond prices themselves were stale, and we’re actually 5% higher than where the market really thinks they should trade when things go back to normal.”

 

Novice ETF investors looking to get into the space can start with funds like the SPDR S&P 500 ETF (NYSEArca: SPY). SPY gives investors an all-encompassing fund that looks to mirror the movements of the S&P 500.

 

Because the fund is so widely traded, it’s liquidity makes it perfect for traders looking to get in and out with the greatest of ease. Conversely, it also suits buy-and-hold investors looking to hold SPY for the long term horizon.

 

Either way, here are some of the key features of the fund:

  • The SPDR® S&P 500® ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”)
  • The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors
  • Launched in January 1993, SPY was the very first ETF listed in the United States

 

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