By Barry Gordon

The second half of the last decade saw an explosion in the number and variety of exchange-traded funds (ETFs) being offered globally and this was clearly evident in Canada.

The ETF marketplace has evolved in three significant ways that have allowed ETFs of all kinds to thrive and become prominent in the financial landscape:

1. ETF providers have become more sophisticated in their ability to come up with different ways to view the investable universe, and have developed new ways to deliver those solutions;
2. Acceptance by both retail and institutional investors of ETF products delivering exposure to more than simple capitalization weighted indexes;
3. More skilled and competitive market makers, willing and eager to work with ETF sponsors to deliver their proposed investment solutions to investors in ETF format.

Each factor has been important in creating the modern ETF landscape. I’ll briefly discuss all three, and then outline how I think the marketplace is evolving — what can be referred to as the next dimension of ETFs.

It will not be news to those of you who have watched ETFs over the past decade that the concept of what defines an index has evolved. Initially, offering exposure to traditional market-weighted indexes such as the S&P 500 or the S&P/TSX 60 at low cost was the order of the day.

Next, the ETF world began ordering itself in different ways, offering exposure to specific sectors, like energy and financials, and to markets that are developing. Most recently, ETFs began replicating the returns of indexes which hold stocks screened for particular attributes — what I call, for lack of a better term, “modern index” strategies, such as economic value added or fundamental value. Set aside whether these valuation methodologies are in fact modern; I use the term only to convey their newness in the ETF sense. Over time, academics have debated the relative merits of all of these strategies.

In addition to the evolution of what constitutes an index, we have observed the development of commodity ETFs, delivering returns on gold, oil, gas, currencies and even volatility, as well as ETFs which offer inverse, levered, and levered inverse exposure to all of the different types of ETFs described above.

Many of these trends have also been seen in the fixed-income world. The general lack of pricing transparency of the bond market has in many respects slowed the growth of fixed-income ETFs but I believe that will change, and indeed we have witnessed a surge in new fixed income based ETFs over the past several years.

The next dimension of ETFs will be focused on addressing modern investor needs, assist advisers in their increasingly complex task of constructing portfolios that deliver better risk-adjusted returns and deliver value for the fee charged.

Barry Gordon is president and CEO of First Asset and XTF Capital.

Disclaimer: Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.