The U.S. ETF industry has been a center of product innovation, and it has seen assets under management double in the U.S. in the past five years alone. That pace of growth is showing no signs of slowing, and more and more folks are looking to enter this booming space for the first time.
At stake is a piece of what is today a $2.6 trillion U.S. ETF market, and one that Nigel Brashaw, partner at PwC Asset Management Group and the firm’s global ETF leader, projects will be a $3.6 trillion market by early 2018.
Speaking at Inside ETFs Sunday, Brashaw said there are several key developments driving this continued growth in assets under management:
Online Platforms Such As Robo Advisors
The future isn’t firms such as Betterment and Wealthfront getting “huge” as much as its digital advice getting better and better. Robo advice itself—digital advice platforms and services—will drive assets to ETFs.
“In 10 years, if you don’t have a digital strategy, you’ll be challenged as an ETF advisor/sponsor,” he said.
Roughly 50% of ETF assets today in the U.S. are in the hands of retail investors. They have kept up in adopting ETFs, and once they start using ETFs, they buy more and more—that’s what research shows. Retail investors will continue to drive adoption, particularly of new-to-market strategies.
Insurance companies and other institutions have been increasingly looking to get into the ETF space both as users and sponsors. It’s a trend that’s only gathering more steam, he says.
Financial Advisors And Intermediaries
“Regardless of regulations, lower costs and benefits of ETFs will continue to drive adoption,” Brashaw said about this segment. “ETFs are going to keep growing because they are better mousetraps.”
Only Good News
The reality is that digitization, lower fees, an ongoing shift to passive investing, regulation and demographics are all trends that benefit the outlook for ETFs. They will be crucial to the future of asset management.
“This is a tough market to be in, but it’s an even tougher market not to be in,” Brashaw said.
So, how do you launch an ETF? In the last year alone, there were some 220 new ETFs launched, and the market attracted a record $284 billion in inflows.
A panel of industry veterans offered four things to consider when launching an ETF:
To Nasdaq’s head of indexes, Rob Hughes, the success of the ETF industry has largely rested on the ongoing “massive” shift from actively managed to passively managed products. “It’s an index-based world,” he said.
Today indexes are ever-so-important to advisors and investors who are turning to passive investment strategies like never before. That makes picking or designing an index an integral part of launching a successful ETF.
“If you are thinking of entering the ETF space, the index is your calling card,” Hughes said, noting the challenge of standing out in a vast ocean of nearly 2,000 ETFs. Index providers are now integral to the ETF creation process.
The good news is that construction capabilities have never been better to create an index and an ETF, and index providers are well-positioned to help support your new ETF once it’s launched. Again, the index and the relationship with the index provider are crucial.
Everyone who gets into ETFs needs exemptive and other regulatory relief from the SEC, which today is a pretty straightforward process, said Jeremy Senderowicz, partner at Dechert.
But a new issuer also needs a package of compliance procedures, which can be a steep learning curve. For example, as an ETF sponsor, you would have to monitor intraday trading, something that’s new to mutual fund sponsors.
The creation/redemption mechanism is unique to ETFs; operations are different, trading is different—all components that require a lot of compliance work, and often require establishing key partnerships with various service providers even if you already have a mutual fund platform.
“Getting these partnerships set up can take just as much time as it takes to get regulatory relief,” Senderowicz said. “It’s not that simple. Your time to market is as determined by these practical factors as it is by exemptive relief.”
There are three main components to ETF operations, according to Sam Masucci, founder and CEO of ETF Managers Group, a private label business.
No. 1 is product design and regulatory approval; No. 2 is pre-launch operation agreements and partnerships—think agreements with a capital markets desk, the custodian, liquidity providers, seed capital source, wholesale distribution, etc.
But finally, there are the day-to-day operations—the in-time creation/redemption mechanism is a crucial process in ETFs. You need to oversee the custodian, and all the financial reporting that goes on in your ETF day in and day out. You also need to oversee trading, as in bid/ask spreads, trading relative to the index, execution on rebalances, etc. You also need to keep marketing materials up to date.
“New issuers seem to struggle the most with daily operations and marketing of a new ETF,” Masucci said. “You don’t make money from operating an ETF, but you have to do it right. You make money from getting marketing materials out there, and gathering assets from that.”
Sales And Marketing
A good sales and marketing plan are perhaps the most crucial element to a successful ETF. It takes more than a name and brand recognition. Consider Russell ETFs—the short-lived lineup of funds that came to market accompanied by the expertise, reputation and the well-known Russell brand, but folded months later.
As Christian Magoon, founder and CEO of Amplify ETFs, put it, the problem in that situation was most likely sales and distribution. Many new entrants to the space don’t research where the bulk of assets are, who is using ETFs, what’s working and what’s not—all elements that should be taken into account in a sales strategy plan. “That’s homework that can’t be done three days before launch,” he said.
It’s important to remember that most institutions won’t even look at your ETF until it has at least $100 million in assets under management. And getting there can take time, so you need to think about your firm’s sales cycle and plan accordingly, Magoon says.
“Initial sales and marketing is a big hurdle that can’t be overlooked,” he said.
The good news is that the ETF sales culture is very different from the traditional fund sales culture. ETF sales are more about asset allocation, and how the ETF fits within an allocation and within sector constraints, Magoon says.
It’s a more detailed, consultative, numbers-oriented sale, rather than a traditional fund sale. A well-built product helps to sell itself.
Contact Cinthia Murphy at [email protected]