Growing An ETF Subadvisor Biz

October 21, 2020

Vident Investment Advisory (VIA), a unit of Vident Financial, is a prolific subadvisor in the ETF industry today, running 40 funds—including Vident ETFs—with about $5.5 billion in combined assets. The firm, previously helmed by the late Denise Krisko, has now enlisted Amrita Nandakumar to lead it forward.

Nandakumar, whose experience includes time at Vanguard and VanEck, sees growth ahead for the subadvisory business, thanks in part to the innovation in nontransparent and semitransparent ETF wrappers. Just as important, the avid member of Women in ETFs says that while her vision is big, so are the shoes she’s filling: “Denise was simultaneously a role model for and in support of women in the ETF industry. Her loss is a tough one, and I'm honored to be stepping into her shoes.”

ETF.com: Tell us why you wanted to join VIA. What appeals to you about this part of the ETF business?

Amrita Nandakumar: After following VIA's growth over the past few years, I really came to believe—and still do—that it is a best-in-class ETF subadvisor. Its reputation precedes it. And anyone who has worked with VIA I think will likely tell you about the extremely strong team behind it—from an experience and capability and a cultural perspective. Personally, I was intrigued by the opportunity to leverage my skills and experience to help accelerate the growth of an already strong platform.

ETF.com: The subadvisory space doesn’t get talked about as much. What should people know about this part of the ETF ecosystem?

Nandakumar: First, I'm gratified to hear you say that, because a significant part of what we do is educate the ETF industry about the role we play as a subadvisor. VIA is more than just a “service provider.”

We can be a partner through the product development process, helping our clients make decisions about the strategy itself, as well as weighing the pros and cons of various structures or wrappers. We can make introductions to those who are crucial for a fund's success—market makers, exchanges, custodians and index providers, just to name a few. And we can share best practices for marketing and distribution based on our deep experience in the ETF industry, as a number of us have spent time with fund sponsors and other ETF businesses prior to joining VIA.

ETF.com: How best do you do due the diligence process if you want to work with a subadvisor?

Nandakumar: I can speak to why I believe VIA is very strong. We are truly independent. Independence is really important. We're not affiliated with a broker-dealer or other financial institution. As such, we don't have a conflict of interest with our clients.

Our goal is mass customization or made-to-order. We've built this platform with the concept of scalability without being brittle. Our platform is strong and diverse, and it spans a number of products and client types.

ETF.com: How do you navigate customization and conflict of interest when you’re dealing with different clients trying to bring to market very similar—competing—products?

Nandakumar: At times we’ll be approached by someone with a strategy that, on the surface, might seem similar to something that we already offer.

But chances are, as we do our own due diligence and work closely with a potential fund sponsor, we end up finding that there are important distinctions within the strategy: If it's a passive strategy, understanding, for example, the index methodology. Or if it's an active strategy, understanding what the goal is of the strategy, how it's being traded, how the components are being researched.

Often, we find that two funds that might look similar on the surface end up being quite different.

ETF.com: The ETF Rule could encourage new issuers to enter the ETF space. Is there a “typical” type of issuer that seeks out the services of a subadvisor?

Nandakumar: With rule 6c-11, we're going to see a greater diversity of clients that seek to work with a subadvisor like VIA. I would definitely say that, no, there isn't a “typical” type of client that works with a subadvisor.

But I’ll say that our channels have traditionally been more institutional in nature, so growing our client base—particularly among newer retail channels—is a goal for us. But I think that will come just as the barriers of entry have been lowered due to the ETF Rule.

ETF.com: What's exciting or uniquely challenging about leading a subadvisory today?

Nandakumar: I'm very excited about the SEC's approval of non- and semitransparent active structures. Our goal in providing active capabilities is to ensure our clients can keep as much of their alpha as possible while mitigating the impact of things such as ETF operations or regulatory constraints. And we've taken the time to understand the approaches that different active fund structures can take, and we've shared that—along with pros and cons—with our clients during the product development process.

As I think to the future, non- and semitransparent is exciting. The original ETF structure democratized investing in a way that I don't believe any of us could have predicted. I see the same potential for these new wrappers.

VIA is already seeing interest from clients who, for the first time, are considering distributing their strategies through an ETF, given that they now have the ability to protect proprietary strategies and trading information. Because of this, investors will have access to even more diverse strategies that might previously have been out of reach.

I also think that given the proliferation of different ETF structures, investors will finally start to move away from thinking of ETFs as a “strategy” and more as wrapper of choice. Moving forward, multifactor active is where I see newer growth coming from, rather than just single-factor passive.

ETF.com: How is the fee compression we see in ETFs impacting the subadvisor side of the business?

Nandakumar: It absolutely affects us as the subadvisor, because it affects our clients who are the advisor.

In being a partner to them, we certainly have to be aware of and appreciate the fee compression pressures that they're under. That fee compression does get passed along to us. That makes it even more important to us to be best-in-class to help them know they're getting their money's worth.

At this point, very few participants in the industry haven't been affected directly or indirectly by the fee compression that advisors are seeing.
Contact Cinthia Murphy at [email protected]

 

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