Behind An ETF Subadvisor

January 29, 2019 Is conflict of interest ever a concern if you subadvise, say, two competing ETFs in a given segment from competing issuers?

Krisko: There's definitely awareness, but no concern. We’ve had scenarios, especially in thematic products, where we've had multiple similar products. As soon as a proposed fund is presented to us that would in any way be similar to or could be perceived to conflict with a fund that we're currently subadvising, we take a closer look at it.

We’ve found that funds that at first glance seem quite similar are often very different once you look at the underlying index methodology and at holdings. We haven't had this problem. How many portfolio managers do you have working on 40 ETFs?

Krisko: We have seven portfolio managers. They all have ETF experience specifically. They also each specialize in a particular asset class. Index portfolio managers can carry many more portfolios than an active manager could, and of the 40 funds, 32 are indexed.

As we have more and more active funds launch—which we have had recently—the number of portfolios per manager will begin to go down. There is more work required with those, more trading. What’s your biggest concern as a portfolio manager today? How is your day-to-day different today than it was a year ago?

Krisko: I’d say the biggest difference is the volatility in the market. It creates a bit more oversight and touch management. Even though many of the ETFs we subadvise are index funds, and they may not be trading on many days, there are still a lot of moving parts going on all the time.

There are distributions taking place, expenses that are coming out of the funds. Managing the cash—particularly when there's so much volatility in the market—requires a little bit more effort. How much of a role do you play in developing a new ETF idea?

Krisko: It varies. People come to us at different stages of the product development cycle. Sometimes they already have their exemptive relief. They have the index, it's already being calculated.

Typically, then, they were going to run it themselves and usually one of the other service providers has said, “Why don't you consider a subadvisor?” So they come to us.

Most clients have the idea developed. They’re working on tweaking it and looking for our assistance on portfolio management and trading. But we can also get involved with the process of discussing index methodology, liquidity criteria, etc. With 2,200-plus ETFs on the market today, are you still surprised by innovation?

Krisko: At times I feel like the market is a bit saturated. But then someone calls with a great new idea. There’s still room for innovation.

A lot of growth will come from firms that may have existing strategies that they're looking to offer in an ETF format. Perhaps they're currently in mutual funds or separately managed accounts, and they’ll be looking to transition to an ETF for those efficiencies. There are also a lot of areas in the ESG [environmental, social, governance] space yet to be explored.

Contact Cinthia Murphy at [email protected]

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