ETF Costs Overshadow Client Alignment

ETF Costs Overshadow Client Alignment

Moving the discussion beyond the cost of ETFs can be difficult, but rewarding.

Reviewed by: Dan Weiskopf
Edited by: Dan Weiskopf

The ETF Think Tank is a community of advisors focused on a client-centric approach to investing through the use of ETFs. Each week, we disseminate research on the growth of the ETF industry, including key performance indicators (KPIs) on number of ETFs listed, assets, revenue, exchange market share and number of issuers. This data is useful in serving to monitor the trends in the ETF ecosystem. ETF Think Tank produces this monthly report for

As of May 31, ETF assets under management (AUM) were back up to $4.23 trillion and ready to challenge the old high of $4.6 trillion (Feb. 16, 2020). However, let’s respect those March historical moments in history where AUM in ETFs bottomed at about $3.345 trillion (March 22, 2020).

The SPDR S&P 500 ETF Trust (SPY) and the iShares MSCI ACWI ETF (ACWI) were trading at $218.28 and $53.31, respectively, and the iShares 20+ Year Treasury Bond ETF (TLT) dropped March 18, 2020 only to rocket back over $166 over three trading days.

I mark the moment as an ETF strategist and investor, knowing that the risks of future declines are not gone. Yet from a monthly KPI standpoint, I am excited that we can now begin to look forward again about AUM forecasts of $10 trillion, $30 trillion or even $50 trillion in the future.

To that point, ETF flows have been hopeful and supportive of change. For example, AUM in environmental, social and governance (ESG) ETFs is now $27.7 billion across 60 ETFs. And Morningstar reported that, as of March 31, 2020, there was nearly $1 trillion in assets in sustainable funds, which is probably the reason ESG is expanding so quickly and will prove a core part of ETF innovation.


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Open-To-Close Ratio At .91 Masks The Healthy Purging Taking Place
The open-to-close ratio hit a new low of .91 (206/226), signifying that more ETFs these past 12 months have been closed than opened.

The trend toward purging unprofitable ETFs from a firm’s lineup that are slow to get outside investor traction may finally become an unintended consequence of ETF expense pressure.

Conversely, eight of the top 10 ETFs launched in May were active, with relatively high fees. In fact, a new brand came to market, 6 Meridian, and raised about $368 million across four funds. This includes $175 million in its flagship fund, the 6 Meridian Hedged Equity-Index Option Strategy (SIXH).

The firms of 6 Meridian and Tuttle Tactical Management are two relatively unrecognized brands in the ETF ecosystem. They offer new types of alternative types of solutions that are priced with fees of 0.81% to 0.97% and 1.59% to 1.87%, respectively.

WBI Investments is another RIA firm that launched a series of eight ETFs with high ETF expense ratios (ranging from 0.68% to 1.28%), and that has not seen much follow-through.

BYOA (bring your own assets) by RIAs and asset management firms that seek to capitalize on the value of the ETF wrapper is expected to continue.

Launching an ETF is the easy part, and it is fair to think that clients benefit by the after-tax benefits of the ETF wrapper. However, returns need to follow, and a broadening of distribution must also follow to make these strategies successful.

There are now 147 brands of ETFs.

Revenue From Active
Active ETFs represent about 2.51% of the total AUM of U.S.-listed ETFs, declining by one, from 275 last month. ETF expense ratios from revenue over the past 12 months remain at about $7.71 billion.

Assets under management is about $112 billion. The revenue number is up from $6.83 billion in December 2018, and will bounce around, but reflects an important aspect of innovation in the ETF industry.

Annual Client Alignment To Innovation
The evidence from “Annual Client Alignment To Innovation” (ACAI) tells us that investors today are looking for more alignment with current market conditions. This means that ETFs looking to launch must be aligned with clients’ desires for targeted alpha, access to solutions with alternative return streams or that are actively managed.

A further explanation can be found in the original study: Measuring Innovation in the ETF Industry.
By isolating the AUM values for launches from 2009 through 2019, we see that AUM was down in aggregate $43.9 billion as of May 31, 2020. However, the launches in 2016 through 2019 saw AUM increases of $20.6 billion, and, with AUM from 2020 launches, the later values have actually increased to $24.5 billion.  

Launch Years200920102011201220132014201520162017201820192020 YTD
Total value of Launches 12/31/19$231,698 $222,384$195,587$228,344$157,949$72,552$74,970$32,066$40,449$37,603$11,439$0
Value of Launches At May 31, 2020$232,306 $224,190$171,605$192,989$150,374$72,995$72,276$41,697$45,952$40,212$16,537$3,872
AUM Increase (Decrease) $608 $1,806 ($23,982)($35,355)($7,575)$443 ($2,694)$9,631 $5,503 $2,609 $5,098 $3,872
AUM Growth from 12/31/190%1%-12%-15%-5%1%-4%30%14%7%45% 
The Top 20 LCS ETFs Launched 15146734384911
The # of Top 20 ETFs As AAA5614131716171216111919
ACAI AUM14.70%11.20%69.50%14.80%70.80%70.80%79.20%61.80%55.50%37.10%98.50%71.38%
ACAI # of ETFs25.00%30.00%70.00%65.00%85.00%80.00%85.00%60.00%80.00%55.00%95.00%95.00%
Cumulative AUM ENDING 12/31/20 for '2009 to 2019 launches  $1,305,040         
Cumulative AUM ENDING 05/29/20 for '2009 to 2019 launches  $1,261,133 (1) AUM is in billions; except for cumulative numbers    
Net Change  -$43,907         
AUM Value Change from launches in 2009 through 2013  ($64,498)         
AUM Value Change from launches in 2014 through 2019  $24,464          

Innovation Over Low Cost
Arguably, this is further evidence by the consistent data trend from the growth of ACAI, both in terms of the top 20 ETFs in terms of AUM and the dominance in more ETFs in the top 20 focused on innovation over low cost (see highlighted purple rows in the above table). This means fewer ETFs are finding success by just competition on low cost, highlighting that there is investor demand for solutions that offer more than just low cost.

Perhaps older products launched between 2009 through 2013 are getting stale or simply are not aligned with current market conditions. While it is true that a majority of flows are concentrated in low cost solutions that focus on cheap beta, much of these flows are in ETFs that were launched prior to 2009, and have established brands, distribution and market share.

This is important, because when we lead with discussions focused on just expense ratio, we are narrowing the opportunity for innovation, ultimately impacting the ETF evolution negatively.

Markets in May rebounded fast in the face of many obvious risks. As a result, we can again start talking about ETF innovation and growing assets in U.S.-listed ETFs.

The proposal to measure ETF innovation according to client alignment is not new, but rather practical. Many clients will always simply want cheap beta, but where alternative structures and return streams can be embraced, we suggest a focus on access to different return streams, targeted alpha and/or active.  

Contact Dan Weiskopf at [email protected] or follow him on Twitter at @etfProfessor

Dan Weiskopf is a Toroso portfolio manager and member of its investment committee. He has over 30 years of portfolio management experience, with almost 20 years as an ETF strategist. Dan is often quoted as saying that "structure matters" more in selecting an ETF than simply its fee.