Interview with Bruce Bond

The exchange traded fund world got a little more exciting this year with the introduction of the first truly actively managed ETFs. Critics — many of them financial advisers who were early adopters of ETFs — argue that actively managed ETFs take the industry in the wrong direction. But Bruce Bond, 45, president and chief executive of Invesco PowerShares Capital Management LLC of Wheaton, Ill., is a true believer in them. His firm, a subsidiary of Invesco Ltd. of Atlanta, in April was the first to launch actively managed equity ETFs, and he said more are on the way. Q. Are you happy with the reception your actively managed ETFs have received? A. I think it's going pretty much as we expected. We expected it to be a little bit slow at the beginning as people get comfortable with the concept of true actively managed ETFs. It has a tremendous amount of promise. Just as people have gravitated toward the ETF structure for index-based investment, we believe that in time, people will gravitate towards the ETF structure for ac- tively managed exposure. We think they will do this for many of the same reasons they have gravitated towards index-based ETFs. There are benefits inherent in the ETF structure that aren't available in many of the other investment structures. Q. Are your actively managed ETFs performing as you expected? A. We're not surprised with the performance. The first funds we introduced are fairly broad-based ETFs focused on large-cap stocks. We expect in time, as additional products are brought to market, and as people get more comfortable with those types of products, we will introduce actively managed ETFs that invest more in the mid- or small-cap area.
Q. What about innovations besides active management? A. At PowerShares, we were the first to launch an ETF of ETFs: basically an ETF that allocates among other ETFs. We think this is a solution that you will see grow in the next several years. We think not only are such ETFs terrific investments, but they are a good way for us to educate others on how we think ETFs can best be used. Q.Do you think ETFs are any closer to gaining wider acceptance in 401(k) retirement plans? A. It's going to take a couple mid- to large-sized 401(k) administrators to begin to include ETFs on their platforms. Once that happens, all the others are going to follow suit. We don't see this as being something that's going to take many years. PowerShares is actively evaluating different ways to crack the code within the 401(k) market so that ETFs can participate. One consideration is that ETFs in general are more tax-efficient than other investment structures, and the benefit of that is somewhat lost within the 401(k) structure. But ... we think that the tax benefit is only a part of the value proposition that the ETF structure makes for investors. Q. What are the ways you might crack the 401(k) code? A. I think there's different ways to do it. You can have a fund of ETFs, or some other structure that makes ETFs available within a 401(k). But what we're looking for is a way to provide the pure ETF. That's going to require some additional capabilities on the side of the 401(k) administrators. We are trying to work though those issues and figure out what the best alternative will be. Q. What do you think about the uptick in ETF liquidations this year? A. It's not surprising to see some ETF closures. Many products were brought over a very short period of time. Some of the sponsors may be struggling to support products that don't have assets. We don't view it as anything to worry about. There's actually about one-third the amount of ETFs in the market now as there were mutual funds in the early 1980s, when mutual funds were at this same asset level. Mutual funds had much greater proliferation. Q. But don't ETFs face competition from products such as exchange traded notes? A. I think ETNs, like ETFs, are just another vehicle by which to gain exposure to the market. ETNs offer exposure to things that can't easily be offered in an ETF. I think you're going to continue to see the growth of the note business. Q. What does that mean for mutual funds? A. They are always going to be with us, and they are always going to be one of the mainstays for investors. But I do think in the coming years we will start to see some of these structured products, from a net flows standpoint, really gain market share on mutual funds and other investment vehicles. Q. To increase net flows into ETFs, does there need to be more of a retail focus? A. There does. I think many individuals today still view ETFs as an institutional-type product, or a sophisticated, professional investor-type product. But that will change consistently with how the mutual fund model grew. First, advisers recommended mutual funds to their clients. Then their clients became accustomed to them and they began to buy them on their own. I think that's what we are going to see in ETFs. Q. Would you agree that the development of actively managed ETFs is crucial to getting more retail investors interested in ETFs? A. We would agree with that. If you look at the mutual fund marketplace, roughly 15% of those assets are index-based and 85% are active. I think that's because people are comfortable with having a fund manager evaluate stocks. There is a certain amount of comfort that investors derive from having a professional do that. That's one reason that we do think that actively managed ETFs ... will be tremendously successful in the future. As people come to the market interested in active management, they are going to have an alternative. Q. But will actively managed ETFs be like passively managed ETFs, a low-cost alternative to mutual funds? A. I do think they will be able to continue to be the low-cost provider. They will not be a commodity like we are seeing with some of the benchmark ETFs. But I think when you compare them with some of the alternatives we're seeing in the marketplace, they will be a tremendous value for investors. Q. Do you see more traditional mutual fund companies jumping into the ETF arena? A. As you look at the marketplace, you really don't see a lot of large mutual fund companies other than Invesco, and soon Pimco [Pacific Investment Management Co. LLC of Newport Beach, Calif., registered in July for exceptive relief from the Securities and Exchange Commission to enter the ETF market]. But if you look at 2007, in terms of net inflows we were 12th with a little over $8 billion. If you look at the top four companies by inflows, three were ETF providers [Barclays Global Investors of San Francisco, State Street Global Advisors of Boston and The Vanguard Group Inc. of Malvern, Pa.]. I think that's going to create a lot of growth in the marketplace. Q. What do you see as the biggest challenges facing the ETF industry? A. I think primarily it is education. We see education as being one of our greatest focuses at this time. PowerShares has these PowerShares Universities around the country, about 16 of them, where we try ... to educate advisers. We have a big effort along those lines. Another is going to be ... continuing to bring out compelling products to pique advisers' interest, and have them start to participate on the actively managed side. Once that starts to move forward, we think that there's tremendous potential there. E-mail David Hoffman at dhoffman@investmentnews.com.