ETF portfolios making waves in the market

Centrally managed ETF strategies are becoming more popular — and more influential

ETF portfolios making waves in the market
The multi-trillion dollar global ETF market is showing no signs of slowing, with inflows into the industry allowing it to reach higher asset levels every month. And while the demand from individual and institutional investors is clear, a large chunk of flows could be attributed to moves made in one increasingly influential business.

Centrally managed ETF portfolios — also known as ETF strategies, ETF managed accounts, and ETF model portfolios — are becoming more popular, reported the Wall Street Journal. Essentially, these are strategies wherein a money manager uses ETFs instead of, or in addition to, individual stocks and bonds to build investment portfolios, which they then sell through financial advisors or brokerage platforms.

Investors’ increased appetite for ETFs has led to an explosion of funds on the market; in the US alone, there are reportedly more than 3,000 ETFs listed. The sheer variety of choice is overwhelming for many investors, who are increasingly willing to let someone else decide on the right selections and allocations of ETFs.

Because there’s little consensus on how the business is defined exactly, no one knows how big it is. According to Mark Wiedman, who runs BlackRock’s iShares ETF business, ETF portfolios accounted for as much as 12% of the US$150 billion their ETFs got from investors this year through the end of July.

Morningstar has counted around US$100 billion held in strategies whose assets are at least 50% invested in ETFs. However, since the firm relies on voluntary reporting from fund providers and excludes portfolios that don’t meet its criteria, there are likely more assets in ETF portfolios that haven’t been accounted for. These include US$20 billion in ETF portfolios run by Wells Fargo, and US$20 billion from Bank of America Merrill Lynch; both companies are far larger than the biggest strategists that share information with Morningstar.

Measuring the business’ footprint is made even harder by paper portfolios, which are created when financial advisors take a model and put their own spin on it. Although big ETF players like BlackRock and Vanguard offer advice in building them — for free, since they can load the portfolios with their own products — such tweaked models are impossible to track.

Recognizing the strategies’ growth, portfolio managers behind the largest ETF portfolios are moving more carefully to avoid agitating the market. They often reach out to market makers and issuers in advance to ensure smooth trades. “Seven or eight years ago, you’d see a lot more dislocation of prices due to people just blasting out trades into the market,” Paul Roettger, ETF trading manager at Wells Fargo, told the Journal.

According to Tim Clift, chief investment strategist at the portfolio-management consulting unit of financial firm Envestment, the average annual fees for ETF portfolios are as little as US$10 for every US$10,000 invested. They’re higher for asset-allocation strategies, which average US$30 yearly, and even more active strategies can cost as much as US$60 a year.

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