ETF.com: On the distribution side, investors said that they find accessing ETFs through ETF platforms makes for expensive and difficult ETF trading. Did that surprise you?
Sullivan: That one was surprising. When we think about the maturity of the ETF market on a regional basis, I was surprised that in Europe and in the U.S., that was still cited pretty substantially from the respondents' perspective.
The intermediary channels—think of the broker/dealers here or the banking networks in Europe and Asia—are often the providers of choice to the end investor. And investors are looking for more choice. They may be looking for different guidelines and selection criteria from those intermediaries to allow more choice.
It’s also a sign that maybe commissions seem to be high for trading ETFs through those intermediaries. This suggests maybe there's some room to come down. We've certainly seen a lot of that in the U.S. in recent years with some of the big discount broker/dealer platforms, the partnerships offered between some of the broker/dealers and individual ETF sponsors.
Investors seem to be clamoring more for not only those reductions in commission, but maybe getting into some significant reduced commissions or waived commissions for certain parts of the ETF market.
ETF.com: Overall, what’s your big takeaway from this year’s data?
Sullivan: We talked about the emerging trend with smart beta and active. We talked about the changes in perception of cost and what else is coming in from an ETF evaluation standpoint.
I think the desire for active is one that bears monitoring. We've talked a little bit about the demand for it, but we could see other things come out over time in the global regulatory environment that may continue to propel demand and create tail winds for active.
If we see advancement of the ETF Rule with the SEC and what many expect to be an even playing field for the use of custom baskets, that could promote more development in the active space as well, especially around the ability to custom-negotiate certain fixed-income positions, for example, and one that could result in more products and more assets and more trading from the primary market, given their ability to understand a portfolio and hedge it appropriately.
If you compare that with Europe and Greater China, transparency is still really the main focus for regulators. We have some nontransparent or semi-transparent products here in the U.S., and there are a lot of patents pending for those semi-transparent products from other shops.
Europe is still waiting on that front, and right now everything has to be transparent. In Greater China, I believe only Hong Kong has actually approved the use and the viability of active ETFs. So, that's something we still think presents an outside channel growth if and when some of the other regional markets there get comfortable with actively managed ETFs.
ETF.com: The flip side of that would be the issue we talked about in terms of distribution and access. There still needs to be development there.
Sullivan: That's one that will continue to be fleshed out. In prior years, we've really seen a focus on education, understanding the nuances of the wrapper. The education efforts are paying off.
And now I think it's a focus toward how ETF managers are working with their intermediary partners to ensure the access and the choice exists, how managers are able to get shelf space with their intermediary partners, and how end investors are able to work through their advisors or their institutional platforms to make the case that they as investors want to see more choice and more product offered. That’s an area we’ll be watching.
ETF.com: On a final note, one data point stood out to me. The survey found that 40% of investors are willing to buy a new ETF with less than $24 million in total assets. That’s hard to believe. What happened to the $100 million, three-year track record minimum we’ve inherited from the mutual fund side? Are ETF investors more willing to take chances on new products?
Sullivan: I've always seen ETFs as a democratizing tool in the investment landscape and one that's accessible by investors of all shapes and sizes. There's no institutional share class in the ETF land.
The notion that investors understand these products, and that they're comfortable buying in, is very cool. It tells us that investors understand how ETFs work, that they're liquid, and that regardless of AUM size, they can still serve a need in the portfolio. So, they're willing to jump into the pool with them.
For a full report of our findings, visit https://www.bbh.com/en-us/etf-survey
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