“Every asset manager needs an ETF strategy”, that quote from a November 2013 PwC report re-enforces why we are seeing strong growth in ETFs. It’s no longer just about the big three ETF providers (iShares, Vanguard and State SSGA) and their 69% market share. Suddenly there is a race to launch more thematic strategies or “smart beta” products and the providers are lesser known or completely new to the industry. This will continue in 2015.
The emergence and growth of the white label ETF platforms that create turn-key operational support for these start-up ETF managers and innovative new product structures like Eaton Vance’s Exchange Traded Managed Fund (ETMF) will also be themes that will dominate the ETF landscape in 2015.
All of which will provide asset managers with additional avenues to enter the ETF community and investors with more choices in using ETFs.
Let’s take a quick look at each of these trends.
The use of smart beta/strategic beta, alternatives and other thematic-type products will continue. This is seen by the recently filings for Goldman Sachs, Janus’ purchase of Velocity Shares and their subsequent filings and NY Life’s purchase of Index IQ and their suite of hedge fund replication products. All three providers Goldman Sachs, Janus and NY Life will be new ETF entrants and the field that was once thought to be saturated is now expanding. This includes index providers as well. Nasdaq just announced an acquisition of Dorsey Wright, an index provider known for smart beta indexing. Adena Friedman , President of Nasdaq, said in the press release. “In our opinion, the next phase in index investment will be from straight passive management to smart beta”.
More consolidation in the ETF Space could be on the way as the M&A activity is not just about product suites but also about efficient ETF operational capacity.
White label ETF platforms are one way for less established providers to get into the ETF business. AdvisorsShares, ETF Issuer Services, Exchange Concepts and Recon Capital (full disclosure, I am an independent Trustee for Recon Capital’s ETF Series Trust) are just a few of the platforms that are available. They provide all the operational support needed to launch an ETF and the breakeven point for a fund launching on one of these platforms can be as low as $50million or lower depending on a number of variables including the management fee of the fund.
The White label firms are actually creating a “Cottage industry” right next door to the big three ETF providers. Asset managers can take their tried and true strategies and convert them into ETFs. New and developing distribution processes allows these new entrants to gain assets without worrying about competing with the larger providers. An example of this would be the funds launched by Vident Financial Services. They launched 3 ETFs with Exchange Traded Concepts and have amassed $1 billion assets in less than a year. They did self-seed the funds with existing in-house assets, which will be a common practice in the ETF industry for a long time.
The importance of creating an ETF offering for asset managers was summed up by Richard Weil the CEO of Janus who said in an Investment News article, “ ETFs will be crucial to winning the business of financial advisers, who, along with other intermediaries such as brokers, account for 60% of the assets Janus manages.”
If mangers do not want to convert to passive products a new opportunity may soon be available to them. That would be Eaton Vance’s ETMF structure for non-transparent actively managed ETFs. (See Talking ETFs article Nov.2014)
2015 is beginning to feel like an explosive year for ETFs. Continued growth, new players large and small from Eaton Vance and Janus to Vident Financial. Plus new thematic strategies and new product structures coming to market.
As always with the ETF industry, it is the investors who become the big winners with increasing product selection and innovative structures.
Richard Keary is Principal/Founder of Global ETF Advisors. Prior to launching Global ETF Advisors in 2009, he was Managing Director of Capital Markets and Head of ETF/ETN Global Listings for the NASDAQ ETF Market. He also served as SVP and Head of Trading for Ladenburg Thalmann in New York.