(opinion) ETFs rose from the ashes of Black Monday. Now they must innovate.

[nitpicker]

http://thehill.com/opinion/finance/356590-etfs-rose-from-the-ashes-of-black-monday-now-they-must-innovate

ETFs rose from the ashes of Black Monday. Now they must innovate.

By John L. Jacobs, opinion contributor — 10/22/17 01:00 PM EDT

(snip)
Nathan Most, an executive of the American Stock Exchange, and his team (including Steven Bloom) began studying the crash of 1987 with the goal of finding a different way to trade baskets of securities. Through much trial and error and after a long, arduous road at the Securities and Exchange Commission (SEC), they finally launched the first ETF in the U.S. — the SPDR S&P 500 Trust ETF (The Spiders) on Jan. 22, 1993. Little did all of us know that we were witnessing the birth of an industry that would come to dominate the markets. The path forward is clear: Diamonds, QQQs, BGI’s portfolio of ETFs and the thousands of other products that followed.

30 years later, this robust industry is facing tremendous challenges of its own. The growth of passive investing at the expense of active investing cannot be denied; it is as relentless as the incoming tide. However, active investing will not disappear by any means. Rather, the balance between active and passive strategies will reach a more sustainable point (with movement back and forth as markets dictate) after the current explosive growth of passive runs its course.

I believe that there are three major interconnected challenges underlying the continued innovation within the ETF space. First is concentration of distribution. A few large firms and their distribution channels continue to drive the ETF field. It is increasingly challenging for the small-to-medium-sized player (or even the lower end of the large player) to compete for shelf space to showcase their products to financial advisors and their customers.

The second major concern is the lack of seed capital for new issues. The vast majority of new products were launched with inadequate seed capital to sustain them through the very challenging market adoption phase.

Directly related to these points is ETF liquidity, including the liquidity of the underlying constituents. Just as we see a concentration in assets under management in the main equity products of the top sponsors, the liquidity or trading in the world of ETFs is also highly concentrated. This makes it increasingly difficult for the new, small product from the small-to-medium-sized firm to establish a foothold in the space. Lack of seed capital combined with the inability to access distribution channels creates a scenario that, despite the headlines, puts the entire business at risk of losing its innovation, the core foundation of the ETF industry.
(snip)