March 13, 2019
All signs point to the ETF industry searching for its next pivot point. To kick us off in 2018, we saw the continued trajectory toward new equity index ETF products first led by the roll-out of blockchain ETFs. However, this year seems to signal something entirely different as there has been little to no fanfare about new ETF products entering the space. Chatter in the industry has revolved primarily around deals between small ETF issuers and the absence of, or less show of strength by, large ETF issuers. Consolidation and slowing product innovation have been the bellwether signaling the maturity of many industries. Nevertheless, that may not be the case in this industry as recent off-the-record conversations amongst industry participants have centered around new ideas that are being developed by niche players funded by private equity. As seen in February at the annual Inside ETFs conference, the ETF industry seems to have refueled from its long upward journey in 2018 and is preparing to pivot towards a new trajectory that, nonetheless, is still pointed upwards.
Over recent months, several interesting trends have come to light such as the increase in demand for alternative strategies. The shift in the risk profile of the markets that occurred last October is still on the minds of advisors. They have also become more comfortable with these complex strategies. However, the challenge remains to tailor the pitch for these products as simple sells.
Education continues to rise as a hot topic. As much as we as industry professionals feel that ETFs have become increasingly more mainstream, an education void still persists. The existing RIA channel provides limited education; however, it is just too broad with its one-size-fits-all approach to be the optimum education solution. The RIA channel also is inundated with ETF wholesalers from a wide variety of issuers who tell different stories about ETFs. There are many independent advisors who are being reached on a very limited basis or not at all.
Turning to new players in the ETF industry, distribution and access to seed capital remain the biggest barriers to entry for the ETF market. New ETF managers with a single strategy continue to use social media as an outreach platform, which may be good for branding, but it has not proven to be an effective way for raising AUM. A more coordinated strategy including website, digital advertising and research content that all connect in a cohesive structure remains key. Raising capital to launch is one thing, but having capital for marketing and the ability to stretch that capital for a few years until assets roll is an oft-overlooked component to success.
New and small ETF issuers continue to look at increasing the likelihood of success in their launches by attracting a larger amount of seed capital. However, seed capital remains allusive. The days of having just a good idea and then launching it as an ETF are over. Lead market makers need to see a well thought out and executable distribution plan before even thinking about allocating basic seed capital. Having access to a dedicated sales force and the proper budget to support it will help in that process.
Larger asset managers and insurance companies are beginning to enter the ETF market. They have the brand, access to capital and the sales force needed to be successful. Leaders in the space have recently noted that actively managed, transparent ETFs — especially fixed income ETFs — are gaining steam and are a great way for asset managers to get involved in ETFs while bypassing the passive argument. Non-transparent, actively managed ETFs are apparently also on their way, as there has been discussion that is perhaps more hopeful than based on fact, with the SEC’s approval coming sooner rather than later.
The growth trajectory of the ETF industry continues its upward movement. Demand for new strategies; well capitalized and experienced new entrants; new structures like non-transparent, actively managed ETFs and a larger RIA audience in need of education are all making contributions to the continued rise of the ETF industry.