PA: What are the benefits of exchange-traded funds [ETFs] and what do they offer as part of a fund lineup?
Kelly: An ETF has distinct benefits that are a tremendous help to plan participants. The ETF structure can help to drive down costs and make a plan more cost-effective for, ultimately, a plan participant. There are other various passive investments that generally have a lower cost structure, too.
Recently, the American Airlines 401(k) plan banned some of its participants from trading in their portfolios. That wouldn’t happen with an ETF. There are no trading restrictions, no minimums and no revenue sharing. You don’t have to hold it for 60 days or pay a 1% penalty for any reason. If you subscribe to a trading service, like some participants in the American Airlines plan did, that’s all right.
ETFs can provide precise exposure to asset classes. So, generally, there’s no style drift in an ETF, except in some of the newer, active ones coming out. An ETF, registered under the ’40 Act also provides full transparency, disclosing its holdings every day. So, there are no surprises—you know what you’ll get. And they’re widely available. Those are all pretty big benefits for plan participants.
Traditionally, it’s a lower cost structure. If you look at WisdomTree, iShares, Vanguard or a Schwab ETF product, you’re still getting high quality; you know you’re getting lower-cost product. So, for a participant to access that, at that lower cost point, it’s pretty strong.
PA: Are there any other hurdles?
Kelly: We’re getting mixed messages throughout the industry. Right now, ETFs are slowly—but surely—gaining traction in the retirement space. The industry is taking baby steps toward getting comfortable with using ETFs. For example, earlier in the year, one major custodian said it wasn’t going to enter that market, but yet it has. It has two separate platforms—one institutional and one adviser-driven, and the latter allows for ETFs.