ETF Edge

This is a 'watershed moment' for the ETF industry, says NYSE ETF chief—here's why

NYSE ETF chief says market is approaching a 'watershed' moment

It's the ETF industry's new secret sauce.

The introduction of nontransparent exchange-traded funds — which are not required to disclose their holdings regularly to investors, as most ETFs are — could soon take the ETF world by storm.

That's according to Doug Yones, head of exchange-traded products at the New York Stock Exchange. He says that with the Securities and Exchange Commission's recent approval of the first confidential ETF, it's an exciting time to be involved in this corner of the market.

"It's a watershed moment for the whole ETF industry," Yones said Monday on CNBC's "ETF Edge," adding that he expected the move to "dramatically" grow the ETF market.

"There's something like $17 trillion in actively managed funds that have not been able to access the ETF market unless the star manager's willing to show everything in the portfolio. This will give them a chance to enter," he said.

With 2,280 listed ETFs now harboring close to $4 trillion in assets in the U.S. market, that's a long way to go for this nascent industry — and Yones plans to capitalize on a good deal of it.

"We're hoping to start to roll out this program within the next couple of months where we'll actually bring ETFs back down to the [NYSE] floor, where you have the designated market maker that can add the human component to trading ETFs," he said.

"We're going to bring the power of the floor, the magnitude of that designated market maker — the person that's responsible to be there — to add liquidity, but also reduce volatility," Yones said. "We've offered this to the greatest companies in the world for over 227 years. It's time to offer that back to the ETF industry."

The NYSE has already been making strides in the ETF space, albeit quietly. Approximately 80% of all U.S.-based ETF assets under management are listed on the NYSE, and the Wall Street exchange has nearly 20% market share in exchange volume for all U.S. ETFs.

And, if you ask Yones, he says: "there's still a lot of opportunity out there, and we are seeing it." 

"We're seeing people come to the industry and say, 'Is there a new way to slice this up?' And I look at something like real estate. Historically, it was just a broad-based REIT strategy," he said. "Now, all of a sudden, you have issuers coming in saying, 'Well, what if I just look at the places that host data [like] server farms?' And now you have an ETF that focuses on cloud storage. So, there are really unique ways to slice and dice the market, and it's happening in the world of ETFs."

Better yet, there's no one part of the ETF market that's cannibalizing another, Yones said.

"The fixed-income story is just in the earliest of early stages. ... It's across the board," he said, referring to the higher inflows fixed-income ETFs have seen lately vis-a-vis equity-based funds. "We've got over $83 billion coming into these funds, and it's not at a loss somewhere else. It's not as if we're seeing equity funds sell off and money flow into fixed income."

Instead, investors are simply adopting the strategy, whether it's for liquidity, simplicity or diversification, the ETF chief said.

"Instead of choosing a mutual fund, they're coming to the exchanges and they're buying the ETF," Yones said.