Surge in ETF-managed portfolios a challenge to strategists

To cope with the competition, ETF strategists are pursuing different business models and partnerships

Surge in ETF-managed portfolios a challenge to strategists

The ETF industry is continuing to cross crucial AUM milestones. Despite outflows brought about by recent financial-market jitters, ETFs across the globe still managed to cross the US$4-trillion mark in reported AUM earlier this month. The latest figures from the Canadian ETF Association (CETFA) also indicate that $181.3 billion in assets have accrued within Canada-listed products as of June 30.

There’s no questioning the appeal ETFs hold for investors, and issuers are doing all they can to capture a share of the still-growing market. That includes developing single-ticket portfolio solutions offering simplified access to their ETF products. While the movement certainly benefits advisors and clients in the retail market, it is also presenting a challenge to one corner of the investing industry.

According to new research from Cerulli Associates, the universe of US ETF managed portfolios — in other words, ETF strategists — encompassed 186 firms and US$127 billion in assets as of Q3 2018. Roughly two thirds of that (US$86 billion) is managed by the 15 largest ETF strategists. Interestingly, the four largest ETF managed portfolio providers are also some of the largest ETF issuers.

With their own proprietary products as the building blocks, large issuers with managed portfolio strategies are able to charge either low or no fees beyond those already paid via their proprietary ETFs. They also report significant investment in research and distribution resources dedicated to such products. That has led 77% of ETF strategists to rate competition from encroaching issuers as their most significant challenge in 2018, up from just 33% in 2016.

“Traditional ETF strategists are disadvantaged in facing such competition as the fees they charge for their asset allocations can appear excessive,” Cerulli observed.

Similar to what is happening in other areas of the investment industry, ETF strategists may need to offer niche strategies to deliver a compelling value proposition. Cerulli cited the smart-beta-only ETF model portfolios offered by 3D Asset Management, as well as tactical portfolios from Richard Bernstein Advisors that actively express specific market views. It also found one third of strategists considering partnering with an ETF sponsor as a sub-advisor, while others are developing or in the process of developing their own ETFs.

“Both approaches present challenges for small and mid-sized strategist firms,” said Daniil Shapiro, associate director at Cerulli. “Launching an ETF is a costly effort and success requires existing clients and distribution capabilities, while partnering with an existing issuer may lead to a more expensive product.”

Partnerships with existing issuers may become increasingly important, however. As Cerulli noted, ETF strategists value support from issuers, particularly when it comes to introductions to and understanding broker/dealer platform gatekeepers and comprehending B/D platform due diligence processes. Sales support from issuers may also abrogate strategists’ desire to launch their own ETF products.

“In light of this, there appears to be both increasing competition and cooperation between issuers and strategists,” Cerulli said.


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