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By Ben Johnson, CFA | 07-15-2014 04:00 PM

Wiedman: Demand for ETFs Should Continue to Grow

Global head of iShares Mark Wiedman discusses the expanded Core Series, common misconceptions about ETFs, and what the future holds for ETF investors.

Ben Johnson: Recent months have seen a number of important changes to the iShares ETF [exchange-traded funds] lineup. Here to discuss the impetus behind these changes and some of the implications for investors as well as to offer some insights into what the future holds for ETFs, I have joining me today Mark Wiedman--he is the global head of iShares. Mark, thanks so much for being here.

Mark Wiedman: Ben, thank you. It's a pleasure.

Johnson: Let's talk a little bit about the recent expansion of the iShares Core lineup. What was the impetus behind this expansion of the Core Series, and what are some of the things that investors should be looking for in this newly expanded lineup of Core funds?

Wiedman: So, we launched the Core Series in October 2012 with a very simple value proposition. We wanted to offer basic building blocks for clients to build the bedrocks of their portfolios. They were priced very competitively with the goal--particularly for buy-and-hold investors, for clients who have long investment horizons for a given position--that, yes, they should care a lot about price. We wanted to make sure that we offered a cost-competitive vehicle that met that need.

What we found is that clients really received it well. First, they loved the packaging of it as a Core Series, and we made it very simple to know which of the 300 products were meant for that kind of usage. And then the second part is that we saw $30 billion flow in. So, we thought we were on to something.

We expanded the Core Series approximately a month ago in June with the notion of adding that next level of granularity. In the original Core, you could invest everywhere outside the United States or you could choose developed or emerging [markets]. What we’ve added now, for example, is Europe or Pacific. We’ve added the next level of granularity on fixed incomes, so you can get mortgages or credit. And then last, we offered a new, interesting twist on broad-market bond exposure that is lower on Treasuries and agencies and a lot higher on some of the higher-yielding product that a bedrock position might want to have.

Johnson: You touched a little bit on the topic of bond exposures. That leads me into a question I'd like for you to take a stab at, which is regarding misconceptions that persist in the ETF marketplace. It's been a number of years, dating back now to 1993, that the U.S. marketplace was born. Bond ETFs, in particular, are relative newcomers, although fairly well-established. What is the single most unfounded myth or misconception that you think exists today in the marketplace about ETFs?

Wiedman: Well, the industry globally is about $2.6 trillion, and it enjoyed very healthy growth, but lots of people don't even know what an exchange-traded fund is. The word ETF for many investors--obviously not people watching this video who know what an ETF is--they don't even know what that term means, and it’s a little scary.

The big myth that many clients struggle with is largely driven by the press, which is the notion of premiums and discounts to what is called net asset value. There is a conservative accounting valuation called the net asset value, which is designed to provide a very conservative understanding of what the value of a portfolio is. It’s backward-looking, it’s based on prior trades, and it's what most people think of as the value of a fund.

The problem is that, particularly under times of stress when market prices are moving fast, a backward-looking price is almost by definition no longer today's price. But that's what premiums and discounts are calculated against. So, people look at the ETF and think, "Oh, it's got a discount problem or a premium problem"--when actually, especially under stress, that usually is the true market price, and the net asset value is really yesterday's price.

Johnson: Is it fair to characterize that as trying to conduct a measurement using a tool that is, in some ways, miscalibrated?

Wiedman: I think that's perfectly right. I think people are looking at the wrong number. Again, especially when markets are moving fast under stress--like when Bernanke made his announcement around the tapering--what you see is clients moving to ETFs, institutional and retail, to get actionable prices right now, not fictional prices that are no longer readily available on the market.

Johnson: The last question I want to ask you is a favor. Could you, for a moment, gaze into your crystal ball and tell me what you think the future holds for ETF investors?

Wiedman: I think what we’re going to see is continued growth across multiple segments here in the United States. Even in our most advanced adopters of ETFs--let's say like RIAs [Registered Investment Advisors] or the self-directed investor--what you will find is that, as a percentage of their portfolios, it's still very small.

So, at the big self-directed platforms, you would find that only between 5% and 10% of clients’ portfolios are in exchange-traded funds. I think that’s going to keep growing. I think we’re far away from a stable equilibrium. But there are whole swathes of the global capital markets and huge segments of buyers of financial instruments, whether they are retail or institutional, who haven’t even started adopting ETFs yet. [There is] tiny penetration in institutions and in most of the advisory world in the United States--still very small. So, I think we’re going to see a lot of growth in those areas.

Johnson: Mark, thanks once again for joining me today.

Wiedman: Ben, thank you. It’s been an honor.

Johnson: For Morningstar, I’m Ben Johnson.

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