Advisors Increasingly Launching Own ETFs

The U.S.-listed ETF hype train has been pulling in plenty of new passengers this year, including a new set of issuers and fund managers from the registered investment advisor world.

Roughly 50 RIA-linked ETFs have been launched as of Aug. 5, according to estimates by ETF.com and data provider FactSet. Those launches include ETFs issued directly by RIAs or by white-label ETF providers using the brand names and strategies of advisors.

Same Strategy, Different Vehicle
Active ETFs have grown in number in recent years, ranging from stock-pickers like Cathie Wood and the ARK stable of ETFs to mutual fund providers such as Fidelity and recently Nuveen.

The semitransparent or nontransparent fund structure is also gaining wider acceptance in the industry, opening up a middle ground for mutual fund providers to offer their existing strategies in a different wrapper without revealing proprietary trading tactics that clients pay for.

It’s not quite as drastic as Dimensional Fund Advisors taking the pioneering step to convert almost $30 billion in mutual fund assets recently into four ETFs. Nor is it an outright rejection of the vehicle, a stance that critics argue can leave mutual fund providers irrelevant as the cost of investing continues to fall.

And it may be just right for investment advisors looking for ways to build out their client lists.

Reaching Self-Directed Investors
RIAs have long viewed ETFs as a competitive threat to strategies in mutual funds and separately managed accounts, says Penserra Capital Management CIO Dustin Lewellyn. Penserra provides a range of financial services to institutions, including ETF subadvisory services.

But as commissions on major brokerages fell to nil and the self-directed crowd grew, ETFs have developed into a distribution channel for an RIA’s strategy. The wrapper also carries the added bonus of not needing a minimum investment from the investor to open an account with the RIA, which Lewellyn says is key for RIAs trying to stay relevant as retail trading rises.

“Some of these smaller RIAs who have the rest of it pretty well-established—the strategy, the track records—have an investor base and ongoing investor interest, they have distribution buildout … but they don’t have the strategy for the ETF vehicle,” he said. “So they say, let’s put [the strategy] in an ETF vehicle, and let’s make sure we price it in a way that doesn’t necessarily cannibalize what we have.”

Aptus Capital Advisors Managing Member JD Gardner said the advantages of the ETF wrapper will draw RIAs toward launching their own funds, primarily as an internal strategy tool for clients rather than competing for individual investor dollars.

Other than the tax benefits, small advisories in particular can find operational efficiencies by putting clients seeking the same type of strategy into an ETF rather than a separately managed account. That would grant clients exposure to all of the RIA’s trades at once versus the advisor managing the costs of making trades on multiple SMAs, Gardner says.

Maybe Not For All RIAs
How those ETFs will go from filing to launch will differ on the size and capacity of the individual advisory firm. While some advisors have the capital and in-house compliance infrastructure to launch a fund on their own, others will have to turn to white-label ETF providers.

The choice to launch a fund also comes down to whether an advisor wants to focus on delivering portfolios to a wide audience, or providing a portfolio as part of a larger wealth management strategy. Gardner notes that an ETF wrapper probably won’t fit the criteria for managers needing more customizable portfolio management across multiple accounts.

Instead, he thinks another sort of technological innovation or regulatory change will be needed to achieve that type of flexibility at scale.

“I just don’t think it’s a long-term deal where you’re going to have every RIA have their own ETF,” Gardner explained.