Ignore ETF Strategist ‘Perfect Storm’

July 07, 2015

It’s common these days in the world of ETFs to argue that the bloom is off the rose in terms of the sharp growth in the past few years in the realm of ETF strategists. But, as I’ve written here before, don’t be fooled.

Yes, Morningstar’s latest report showing a decline of assets controlled by ETF model portfolio designers is astonishing—especially considering how much ETF use is growing. Last year, a record $244 billion flowed into ETFs, and it sure looks like this year’s asset haul will be even higher.

The headline ETF strategist number of assets of $86 billion at the end of the first quarter was lower than the $103 billion at the end of the same year-earlier period. That decline is even more noteworthy considering markets were rising during the period, meaning the outflows captured in Morningstar’s survey were sizable enough to offset the rise in asset prices.

But there’s more here than meets the eye, not least that Morningstar’s report doesn’t capture all the ETF strategist assets.

Moreover, it’s easy in all the asset-tracking to lose sight of the overarching value of ETF model portfolios. They are less about chasing returns and more about providing a cheap, dependable way to outsource asset allocation to advisors keen on doing real financial planning for their clients.

The Perfect Storm

Just the same, a lot has indeed gone down in the past year that has cut asset growth in the ETF model portfolio world at the knees. But these developments involving the biggest players in the space aren’t likely to be repeated anytime soon. Consider the charges of fraud at F-Squared in the past year; the performance-related problems at Good Harbor; and finally, the departure from Windhaven Investments of its founder Stephen Cucchiaro.

Each of these totally distinct story lines—criminality at F-Squared; performance promises that couldn’t be kept at Good Harbor; and sticky assets at Windhaven that became unglued when a towering figure exited—led to outflows. And it reordered the top three ETF strategists in the space, as we reported here in May.

But the likelihood of this sort of “one, two, three” punch ever repeating is almost nil, which is why Morningstar analyst Ling Hew calls these events “the perfect storm” that’s likely to flatten the competitive landscape in a good way going forward.

The takeaway is that those wondering if the ETF strategists space is somehow stricken and now in decline are off the mark. Growth may be slowing, but it’s certainly not reversing.

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