ETF Strategist Space Struggling To Grow

April 10, 2017

Everyone loves to talk about the ETF market’s impressive growth rate, year after year. Assets under management are nearing $3 trillion in the U.S. alone, and in the first quarter of this year, ETFs saw record-breaking inflows of $135 billion following record net creations in 2016.

This is an industry that’s in the business of breaking records.

But there’s a segment of the ETF industry that’s not enjoying its share of this blockbuster asset growth story: the ETF strategist space.

Market Share Eroding

In many cases, some of these strategists offering ETF portfolios to advisors and investors are actually struggling to grow, if not altogether losing market share.

At the end of 2016, ETF strategist portfolios commanded about $85 billion in assets spread across 881 different portfolios, according to Morningstar data. (That’s the most recent assessment of this universe, but it’s important to note that it’s self-reported data.)

That total represents, in a way, a recovery from year-earlier levels. At the end 2015, that number was $73 billion across 755 portfolios. AUM growth year-over-year is a healthy 19%.

But consider that 126 portfolios were added to the universe in one year, per Morningstar data, and total assets under management, while larger, aren't exactly a new milestone. We had been here before, and we had seen larger AUM totals than this.

Back in March 2015, or two years ago, ETF strategists already managed about $85 billion—like today—and they did that across 700 portfolios, or 181 fewer portfolios than today.

Look at these industry numbers provided by Morningstar—ETF strategist AUM at the end of each calendar year: 

Calendar Year ETF Strategist AUM (B)
2016 $85
2015 $73
2014 $91
2013 $96
2012 $63

Source: Morningstar

The needle really isn’t moving much in this segment of the ETF industry, and for a few good reasons.

Challenge 1: Fee Compression

ETF wars are highly publicized in the ETF space. ETFs are cheap, are getting cheaper and investors like it. ETF issuers have faced the pressure to lower costs whenever possible, particularly in plain-vanilla strategies.

And in the advisory space, expectations of low returns since the 2008 financial crisis have put significant pressure on advisors to reduce fees—at the end of the day, no one wants to pay a lot to get so little. Rethinking value propositions is a common topic among advisories these days.


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