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“The growth of ETFs in U.S. capital markets is a textbook case study in ‘Disruptive Innovation,’ right alongside well-known historical examples like Amazon, Google, Facebook, Netflix and scores of others successful enterprises.”Nick Colas of ConvergEx

 

ETFs have long been compared to popular disruptive technologies, from digital music to Uber.  But as Amazon boxes continue piling-up in my house during this festive (and expensive) holiday season, the similarities between ETFs and the online retail giant strike me as particularly interesting.  As a devoted user of both, let me explain.

Global ETF Assets 2003 – 2016

Source:  Statista

 

Amazon’s Net Sales Revenue 2004 – 2016

Source:  Statista

 

The shape of the above charts is nearly identical, but that’s not where the similarities end:

>  The first ETF, SPY, began trading in 1993.  Amazon was founded in 1994.

>  Both ETFs and Amazon have evolved considerably since those early days.  ETFs were born out of the 1987 crash as a means to provide liquidity and have since morphed into offering investors everything under the sun.  Amazon initially launched as an online book retailer and morphed into offering consumers… everything under the sun.

>  Both have clearly benefited from the rise of the Internet.  The internet brought transparency to fund costs and performance, providing investors the ability to comparison shop and conduct better due diligence on their investments.  That helped fuel the growth of low cost, index-based ETFs.  Obviously, Amazon’s entire business model is predicated on the internet.  Online transparency has helped them showcase lower price points, not to mention the ease and efficiency of purchases.

>  With increased transparency on costs and quality, both ETFs and Amazon have created tremendous pricing pressure in the market.  Expensive, poor quality incumbents have been and are being exposed.  If you offer the same product for more (think expensive, closet indexing active managers in investing or DVDs in retail), you’re toast.  In this model, investors/consumers win and fund companies/retailers generally lose:  “The ETF Industry, like Amazon, is become of victim of price wars”.

>  ETF providers and Jeff Bezos are continually innovating and seeking new ways to improve.  This mentality is forcing innovation across both the investment and retail landscape, with old guard mutual fund companies now launching ETFs and old school retailers beefing-up their e-commerce presence.  Investors and consumers win.

>  ETFs are disintermediating the expensive, mutual fund middleman/broker.  Amazon has cutout the middleman altogether.

>Interestingly, questions have been raised about whether both ETFs and Amazon are getting too big.  However, each still represents a sliver of their respective broad markets.

U.S. Stock ETF Assets Compared to Total U.S. Stock Market

Source: @EricBalchunas

 

Total U.S. E-Commerce Sales Compared to Total Retail Sales

Source: @billsweet

 

The above charts aren’t exactly apples-to-apples, but you get the point.  I could go on – from the way both leverage technology such as artificial intelligence to how commission-free ETF platforms are akin to Amazon Prime, but again, you get the point.  As a side note, I would love to see Amazon’s user rating system implemented for ETFs.  Let actual users of ETFs provide star ratings and feedback on their investment experience.  That might help improve ETF education and awareness – and, perhaps, crowdsourced ratings would serve investors better than other rating systems.

Nevertheless, expect both ETFs and Amazon to continue dominating the conversation, disintermediating the status quo, and benefiting end users.  I’ll leave you with this mind-boggling thought: