Talk of the market reaching ‘peak passive’ is way off the mark, with fixed income exchange-traded funds (ETFs) still very much in their infancy, according to Derek Fulton, CEO of First Trust Global Portfolios.
Such has been the growth of passive investment, the CFA Society of New York even held a dedicated conference on the subject earlier this year, exploring whether the exponential growth of passive investing posed an existential threat to markets.
But for Fulton, here in Europe, the market is still in its infancy, with ETFs only around 5% of the market, compared to 20% in the US.
‘Have we reached peak ETF? No, we’re just getting started in Europe,’ he said.
‘It’s only just got started in fixed income. There is €25 trillion (£22.2 trillion) in bonds in Europe, but less than €200 billion in ETFs. It’s only just begun with that part of the market, and we are also going to see factor-investing coming into fixed income.
‘Compared to equity ETFs, that market is 10 years behind and with the technology and the data we have now, it is much more powerful. There is an opportunity for ETFs to become as big a story in Europe as they are in the US.’
Fulton also sees thematic investing as a key growth area for ETFs. First Trust, which is the sixth largest US ETF provider with around $65.4 billion (£50.9 billion) of assets, has made its name in Europe by launching more esoteric products, rather than just joining the price war in the market covering the major global indices.
The company established its Dublin Oeic in 2013, and this year alone, it has caught the eye with the launch of artificial intelligence (AI) and robotics, and internet and blockchain products.
An industry first
While a number of rivals, both active and passive, have launched AI and robotics products over the past year, the blockchain launch, back in April, was claimed to be an industry first.
Thematic for some is a fad for others, so how does the firm decide on which trends have real legs and disruptive potential?
‘There is always the sense of is this a bit of a flash in the pan? You need to be diligent about the themes you want to explore.
‘We have a very strong view of how the economy is evolving and that’s reflected in our products. We’ve never closed an ETF, and we have 132 in the US,’ Fulton said.
The blockchain ETF, First Trust Indxx Innovative Transaction & Process, is focused on the ‘users and enablers’ of the ledger technology, describing them as the ‘pickaxe for the miners’ back in the days of the gold rush.
He is keen to dispel the perception that blockchain and bitcoin are one and the same, highlighting the fact that email was the first killer app of the internet. It was just a tiny fraction of the technology’s scope, just as bitcoin and cryptocurrencies were the first killer blockchain app.
‘We need to explain that crypto is just a use of blockchain, just as email is a use of the internet, and crypto is the first killer app of blockchain, but it’s only a tiny percentage of its potential,’ he said.
‘Blockchain has the potential to complete the next phase of the internet revolution.’
He points to real world examples of blockchain’s increasing take up, pointing to Walmart as an example. The retail giant has been working with IBM to develop ways of better logging its supply chain, and from next September, it will require all of its suppliers of leafy green vegetables to upload their data onto blockchain, so it can be tracked.
The First Trust Indxx Innovative Transaction & Process ETF’s top 10 holdings
Advanced Micro Devices: 3.4%
Nordic Semiconductor: 2.81%
Texas Instruments: 2.73%
ASUSTeK Computer: 2.67%
NVIDIA Corporation: 2.67%
Intel Corporation: 2.66%
Source: First Trust (as of 29 June)