Editor’s Note: This article is the second in a five-part series addressing the distribution challenge across the ETF ecosystem, from issuers to advisors to home offices and end investors. Jillian DelSignore is principal at Chicago-based Lakefront Advisory, a firm focused on improving and scaling distribution strategies in the ETF industry.
The ETF Rule is impacting the shape of the ETF industry, as we mentioned in detail in our first article in this series, ETFs Are Sold, Not Bought. The gist here is that such regulatory changes have made it easier to bring ETFs into the market, but they have also meaningfully ratcheted up the competition and the need to be differentiated among a growing number of issuers.
But the ETF Rule is only one of three dynamics reshaping the distribution challenge for ETF issuers. The elimination of commissions on custodial platforms like Schwab and TD Ameritrade is another. There is, all of a sudden, no moat around those issuers who chose to participate, and RIAs can access any ETF they want without a commission.
The third dynamic adding to the already competitive distribution landscape is the approval of active nontransparent (or semitransparent) models, which have already begun to attract many traditional active mutual fund managers to the ETF party.
For investors, these changes have all been good, because they ultimately mean more choice at lower and lower cost. But they have increased the challenge for issuers as they look to differentiate themselves in a crowded field, and try to get their products into the hands of investors.
All About Access
The heart of the distribution story centers on access. What investors do you want to access? Can they access your ETF? Do you have the resources in sales and marketing to access your desired client base? Can your competitors access those investors just as easily?
This battle for access has been heating up. But there are three key things issuers can do to tackle this challenge: focus on advisor engagement; build awareness; and develop a distribution approach.
At a very high level, whether your ETF is only available on custodial platforms for RIAs, or whether it grows to a size that allows you to access firms like Merrill Lynch and Morgan Stanley, you still have to engage the advisor.
For those not as familiar with the various home office approval processes (we’ll dive into that in our fourth article), know this: It is a process. Advisors have myriad investment choices at their fingertips, and much more on their plate than just managing portfolios, to say nothing of the hundreds of emails from firms just like yours clogging their inbox.
You have to stand out in the crowd, not just with a great product and a compelling—succinct—story, but with resources, knowledge and support.
Engaging the advisor isn’t just about my ETF versus the other ETFs, it’s also about offering research to support the due diligence process, portfolio analytics to show how your ETF fits in a portfolio, and insight into the impact that adding your ETF to the mix will have.
You also need to have the capital markets resources to help advisors understand how the fund is trading, and so on. Engaging the advisor requires a full-package approach that goes well beyond the ETF itself.
In light of that, the question is, what leads to an ETF gaining traction? What is the recipe? Market conditions, cost, an innovative idea, a bit of luck, if we’re being honest, and more than anything, making sure the ETF is accessible are all key to building awareness of your fund.
That awareness isn’t easy for the largest issuers given the increased competition, so imagine what it’s like for the smaller issuers—sometimes shops with only one to five ETFs. They have to try to compete, protect their IP and raise assets, but in a far more resource-constrained way.
Raising awareness can often be expensive. Conferences, webinars and paid media all cost a lot. But we find ourselves in a unique time, where essentially everything is being done virtually.
While sponsoring a conference will still come at a cost, in many cases that cost could be far less than before, in a remote setting. It’s likely that the attendance at conferences, and therefore eyes on your brand, will go up as well since you can now attend from the comfort of your home office on demand.
And don’t overlook the impact you can have through other, cheaper avenues like raising your voice in the print and television media as well as more industry-focused social media like LinkedIn and the FinTwit communities.
Detailed Distribution Approach
Is distribution complicated? Yes. Is it infeasible? Certainly not—far from it. There are a lot of examples of great success stories of new ETFs from large and small issuers alike. It is absolutely true that an ETF can catch fire at any given time based on market conditions, and 2020 has been the perfect example of that type of year. But we shouldn’t think that’s the norm.
Going from zero to $100 million is getting harder by the day. Issuers need to have a detailed distribution strategy on how you will commercialize your ETFs before they ever hit the market. Formulating a plan of attack on who to target, understanding your key competitors, and knowing what story to tell and where in the market to focus is more critical than ever.
Tactically, an in-field external sales team may not be economically possible for some issuers, but again, this current environment presents an opportunity. Essentially all external salespeople are now functioning as internals given the inability to travel and see clients in person, so everyone is grappling with how to shape effective outreach. There’s arguably never been a better time to think about how a more virtual sales effort coupled with a digital strategy can work for your specific needs.
If You Build An ETF, They May Or May Not Come
Even with all of this, growth is not likely to happen overnight. It takes patience and commitment to the strategy.
This is not simply a David vs. Goliath story either. While there are real resource inequities between the largest and smallest issuers, this does not necessarily mean that only the large will succeed.
We find ourselves in a time that presents unique opportunities for structuring distribution strategies regardless of the size of the firm. Although some of the newest entrants in the industry are well-established asset managers and distribution powerhouses, they still face many of the same challenges in making their ETFs accessible, and gaining the mindshare of advisors.
As I said before, the ETF industry is one where innovation shines, and we want that to continue. Industry changes have in theory leveled the playing field, but have they really? I’d argue not as much as we’d like to think.
There will always be issuers with more resources, more people, a louder voice. But a calculated strategy that navigates access, with strong advisor engagement, awareness, effective distribution and all-around support can help even the newest entrants gain a foothold.
I’d love to hear your thoughts and concerns about ETF distribution throughout this series. Reach out to [email protected].