The ETF-enlightened advisor
Why aren't more investors looking into ETFs?
Two reasons: 1) the public's lack of interest in investing in general following the 2008 financial crisis, and 2) the inertia of the investment industry, which has armies of advisors built around the higher fee structures of the mutual fund industry.
But that is starting to change. At the Inside ETFs conference, there are about 1,500 small, independent registered investment advisors (RIA), many of whom now use ETFs partly or exclusively to invest their client's money. While many investment advisors will typically charge a 1 percent fee, many of the independent RIAs charge less, 0.5 to 0.8 percent, because of the relative ease and lower cost of managing portfolios of ETFs vs. traditional mutual fund-type products. The biggest growth in the last five years has come from investment advisors. They realized that they can still charge a reasonable fee of, say, 0.5 percent when they are in ETFs that only have 0.1 percent fees!
Bottom line: There is plenty of room for growth in the ETF industry, and there are two pieces of "unfinished business" for ETFs in 2014 in particular.
1. Make inroads into the 401(k) market.
Charles Schwab has promised for several years that they are on the verge of cracking this nut, but 2014 may be the year it's finally accomplished. One key will be to provide a reasonably wide sampling of ETFs and not just a single ETF family. In interviews, Schwab representatives have said they plan to offer more than 100 ETFs.
2. The debut of large-scale actively managed ETFs.
Only 4 percent of ETF assets are actively managed—4 percent! The only notable actively managed ETF in existence is the Pimco Total Return ETF (NYSE ARCA:BOND) run by Pimco bond guru Bill Gross. It's been a phenomenal success, though it saw outflows last year. The main problem for active management ETFs: Will they be transparent? Active managers who run an ETF would be required to disclose their positions on a daily basis, which most don't want to do. There is a proposal at the SEC to allow for "blinded portfolios," which do not require fund managers to disclose their positions every day. The industry is still waiting for the SEC to approve this type of structure.
—By CNBC's Bob Pisani. Follow him on Twitter @BobPisani