Michael Latham is co-chief executive of iShares at Barclays Global Investors. He joined BGI in 1994 and previously served in various roles including chief operating officer for the iShares business. Latham is a certified public accountant.

IndexUniverse.com's Heather Bell recently caught up with the busy BGI executive to discuss the state of the industry and the company's iShare brand across the world. Below are excerpts from that conversation.

IndexUniverse.com: Where do you think the ETF market is headed?

Latham: First of all, I think the market itself is likely to double or triple in size over the next four to five years. And I think a couple things are going to happen. One is that all the pressure on advisers and plan sponsors to be better fiduciaries for clients [will result in] more transparency on fees. The other trend that’s going to help ETFs is that we’re starting to see signs that people want iShares and ETFs in their retirement accounts. I think that’s another area that’s going to take off.

On the product side, fixed income is still way underrepresented compared to where fixed income investing is in people’s portfolios. ETFs provide a great way to invest in fixed-income because the challenge with fixed-income investing is the lack of transparency into the pricing of underlying issues. ETFs provide that transparency. I really think that’s going to become one of our big growth areas, which is why we’ve been so focused on it for product development.

IndexUniverse.com: What are the primary drivers of growth for ETFs?

Latham: One will be the adviser accounts in the U.S. because of this fiduciary issue we talked about. They are going to be required by law to be a more serious fiduciary for their clients, and that’s going to push a lot of people toward a fee-based business model, which is good for us.

The other thing that’s going to grow rapidly is ETF use overseas. Europe had the best year ever last year. They had been growing by about $10 billion a year in assets in iShares, and last year we got $25 billion in new assets. And we’re not the only ones—that’s still only about 30-35% of new assets, which means the whole market is just exploding.

Another area is the two emerging regions; both Latin America and Asia are showing really good signs of significant growth, but it’s still a couple years away.

On the 401(k) side, I think that is going to be a huge driver of growth in the next 10 years, but over the next five years it’s going to start growing, but it’s not going to be the major driver.

IndexUniverse.com: In the long run, was last year's market meltdown a positive for ETFs as an industry?

Latham: I think it was good because people understood liquidity risk much better than they did before; they understood why transparency is important. So these features of ETFs that we at iShares have been educating people on for the past 10 years came to the forefront. That’s going to continue to help us over the next few years.

IndexUniverse.com: Do you think investors are far more aware of ETFs as a product at this point?

Latham: I think awareness has definitely increased, but there’s still a huge percentage of financial advisers—the people who are most on top of the markets—who don’t fully understand ETFs. When we’re out in the marketplace meeting with advisers, we still get some very basic questions. It feels like while there is more awareness, there’s still a huge education curve. At a cocktail party, among nonfinancial professionals, the percentage is even lower.

I’m not worried at all about saturation—we’re still only 10% of the total mutual funds market. Many investors that invest directly in stocks and bonds, that market’s even bigger than the mutual funds market. And a lot of our money we think comes from that side of the market, not from mutual fund holders who convert over.

IndexUniverse.com: Do you think active management is going to take off in ETFs?

Latham: I think it’s going to come, but it’s going to be slow. I think it’s going to start with simpler active strategies that are easier to be transparent, that the investment manager is comfortable with being transparent to the market. And over time, I think it will build, but I don’t see actively managed ETFs necessarily as a big boom in the ETF market. I think where you’re going to continue to see the growth is in more and more asset classes, maybe some things like risk factors that you can build ETFs around; and more fixed income, more emerging markets. From a product perspective, those are the sorts of thing that will drive asset flows for the next five years, much more so than active.

1 | 2 |