There’s nothing inherently wrong with established banking titans entering the growing ETF industry with their own funds. But what if they come to own a big slice of the market pie not by competing for assets — but by bringing their own?
That’s the question raised by the practice nicknamed BYOA, or “Bring Your Own Assets,” observed in the US ETF industry. “Almost every issuer has repackaged some of their ETFs into other investment products … [buying] substantial slices of their own ETFs on behalf of clients,” reported the Wall Street Journal.
The BYOA model is most useful for new ETF businesses trying to get off the ground. ETF strategists and advisors may adopt a wait-and-see approach with their clients’ assets, refusing to invest in funds that don’t meet minimum size, tradability, and track-record requirements. With newcomer ETF businesses at a disadvantage, there’s an understandable effort to leverage existing clients and sales forces from other parts of the firm, like broker dealers and advisory businesses.
One prime example south of the border is JPMorgan Chase. Based on an analysis of regulatory filings and FactSet data, the Journal found that JPMorgan’s ETFs raised US$15.6 billion last year. That includes products that, weeks after being launched, came to be among the fastest ever to cross the US$1-billion AUM mark. But the biggest buyers, it seems, are JPMorgan’s own clients.
“By buying JPMorgan’s ETFs on behalf of customers, JPMorgan’s private bank and wealth management divisions helped the JPMorgan BetaBuilders Japan ETF BBJP reach US$3.3 billion in assets by the end of the year,” the Journal reported.
The tide of client money allowed the New York bank to rise from an ETF also-ran to the 10th largest issuer in the US. At the end of 2018, its affiliates owned 53% of the firm’s ETF assets; among its 31 ETFs, 23 had the bank as the top shareholder.
While other ETF issuers also engage in BYOA, the Journal found in its analysis that JP Morgan has taken it to an extent far beyond what other top 10 providers are doing. The practice doesn’t breach US regulations, assuming conflicts are disclosed; investors may even benefit from lower fees often charged for affiliated funds and services. And JPMorgan’s Japan ETF, when compared to a rival fund from BlackRock’s iShares lineup, is considerably cheaper.
“There is robust disclosure provided to wealth management clients relating to conflicts arising from the investment of client assets in JPMorgan managed strategies,” JPMorgan spokeswoman Kristen Chambers told the Journal. She added that JPMorgan clients saved 10% to 60% in fees by switching from competing ETFs to theirs.
Still, some thorny issues remain. It’s in a firm’s interest to make more money by steering investors toward in-house products. What’s more, fund portfolio managers may be loath to liquidate a home-office fund if there’s a prospect of the company’s bottom line taking a hit.
Such dilemmas are bound to get harder to avoid as long as the ETF industry continues on the path to complexity. With fund getting bundled and repackaged into investment products sold by affiliates and third parties, it’s not inconceivable for providers to find oblique and opaque ways to promote their interests at customers’ expense.
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