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NYSE’s Yones has front row seat for ETF growth

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Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange, tells Bailey McCann that he has had a front row seat for the growth of ETFs and he says this year has been one of the biggest to date.

“The types of products we have been working on with issuers now are interesting and often times a bit more complex,” he says. “There are structured products, hybrid funds, a lot of thematic and niche sector ETFs coming to market. The product launches scheduled for the next six months are actually quite strong. 2019 will prove to be one of the stronger second halves of a year we’ve seen in some time.”

 
The robust pipeline of new product is likely to continue apace in 2020. Earlier this week, the Securities and Exchange Commission adopted Rule 6c-11, dubbed the ‘ETF rule’ by industry denizens. The rule, which has been in the works for nearly a decade, makes significant updates to how ETFs are brought to market and regulated. The biggest change is the elimination of the exemptive relief requirement, which made ETF issuers file to get special permission under the Investment Company Act of 1940 for each new product. This process created a backlog of
ETFs waiting to come to market and because of how inconsistently applied the exemptions were, issuers had no way of handicapping when or if an ETF would be approved. The new rule gets rid of all of that and will give issuers an easier glide path to market, unless they are issuing more complex levered ETFs or investment trusts. Issuers will also be able to offer custom baskets, which many hope will support the transition of more strategies from mutual fund structures to ETFs.
 
The timing of all of this is ideal for Yones’ work with the NYSE.  The majority of Yones’ career has been centered on ETFs as he was an ETF product manager at Vanguard, eventually leading the domestic equity index/ETF product management team in the US before joining the NYSE in 2015.
 
At the exchange, Yones has revamped the role the NYSE plays when it comes to new ETFs. Historically, the exchange was just that – an exchange. New products were listed as they were approved and the NYSE handled that bare bones process.  When Yones came on board, he wanted to build a more comprehensive approach that filled in a lot of the gaps he noticed at Vanguard.
 
“I was excited to join the NYSE and change the ETF business from a transactional relationship into a consultative business,” he says. “We’ve built the largest ETF team globally from an exchange perspective, offering end-to-end consulting, advice and recommendations for every stage of an ETF issuer’s entry into the marketplace. From start to finish we oftentimes become a part of an asset manager’s project launch team as well as offer deeper ongoing consultation.”
 
Asset managers can still get a basic listing, but Yones says that many firms appreciate a higher-touch relationship.  As the ETF industry has expanded, more asset managers are looking at the structure, but it’s not always clear how to migrate strategies over without trading away performance or some other aspect of an approach that investors like. The introduction of non-transparent ETFs opens up the ETF space for active managers that had considered ETFs but couldn’t figure out how best to make it work.  Against this backdrop, the consultancy model Yones pioneered is paying off.
 
Yones’ efforts are also helping the NYSE stand out in an increasingly crowded exchange market. Exchanges have always competed against each other for IPOs, new products, and trading volume. But there are more exchanges now and the barriers to entry have come down over the years. For Yones, the competition is a positive. The NYSE has arguably one of the world’s biggest first-mover advantages and the growth of new exchanges, surprisingly, seems to be helping them keep it.
 
“What competition has done for the market is to help us display the capabilities of the New York Stock Exchange. ETF issuers are now more focused on market quality, and they ask us now to walk through the quality statistics of each exchange. That’s ideal as the NYSE is far and away the most liquid ETF market in the world,” he says.
 
As he looks ahead into what comes next for ETFs, Yones says that active management will be where a lot of the action is. While transparent active ETFs have been around for decades, some asset managers have stayed on the sidelines hoping to protect their edge.  Opaque ETFs could solve some of that. Yones adds that the growth of actively managed fixed-income ETFs has served as proof of concept for cautious active managers and he’s having more conversations with asset managers of all types about how to put active strategies into an ETF whether transparently or opaque.
 
“More active managers continue to be intrigued by the growth prospect of ETFs. There is just a tremendous tailwind for ETFs in general,” Yones says. “Many active managers need a lower cost structure to help increase their fund’s performance. The tax efficiencies can also add an important factor.”
 
The next decade could also see a significant shift in how the market thinks about ETFs, Yones argues. Non-transparent ETFs are raising a lot of questions for investors and asset managers but as they become part of the market, much of the concern may fall away. “I wouldn’t be surprised to see more non-transparent ETFs than transparent ETFs over the long term,” Yones says. “I believe investors are going to focus in on the strategy, and less about the specific ETF model.”
 
From Yones’ vantage point, ETFs are still in relatively early innings. Many asset classes and investment strategies still aren’t represented in the ETF market, which provides an opportunity for growth. Eventually, Yones says, investors could run entire portfolios of ETFs that effectively represent all of the active and passive strategies that are only available in other fund structures right now.
 
“The growth potential for ETFs remains as big of an opportunity as it ever has been,” he says.
 

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