Technology Changing Face Of ETF Biz

October 05, 2017

Nigel BrashawTechnology and ETFs go hand in hand, with digital innovations from algorithms to back-office software to distribution reshaping not only the way we invest, but the way the industry meets those investor demands.

In a recent report surveying ETF executives across the globe, PwC found that technology is changing the face of the ETF business, as automation, fee compression and better customization become the norm. Nigel Brashaw, global ETF practice leader, offers us some key takeaways from the report “Live Digital Or Die.” Your report looks at how technology's impacting ETF issuers and ETF service providers. You say technology's changing the economics of this business. What's the big picture?

Nigel Brashaw: In the report, where we survey several executives, we encourage our clients to think about which ETF market they're involved in. That determines how technology is impacting their business, and from a technology perspective, where they should be focusing.

We divide the ETF market in three buckets. The first is the plain-vanilla index replication, where you're going to have issuers focusing on operations and using technology to continue to drive down costs and drive efficiency. It’s all about lowering fees.

The second bucket, smart beta, is tending toward commoditization, so you can innovate and do well. But that innovation premium decays over a period of time as other entrants copy successful products, and launch similar products with lower fees. Again, you're going to want to focus on operations and distribution in that space.

The third area is in the active space. People want to be efficient, but you've got to be focused on the perspective, on performance, whether that's artificial intelligence, big data and other technologies. Technology will drive growth and distribution.

When you drill down into each of those markets, the things that are happening from a technology perspective are significant, but they're different depending on those markets. Is there something unique about the way technology's impacting the ETF business?

Brashaw: When you look at distribution and automated advice platforms, they tend to be powered by ETFs. The real growth—and we're predicting fairly significant growth in the space—is going to be good for ETFs, and outstrip potential uplift for mutual funds.

That’s fairly unique to ETFs. It’s not so much about the technologies around performance, but how it impacts distribution that’s most unique to ETFs. If you're a firm trying to get into the ETF space for the first time, is the challenge different than it was, say, 10 years ago, because of new and changing technology?

Brashaw: Even 10 years ago, in that plain-vanilla space, it would have been a scale business. Those challenges still exist. But in the last 10 years, we've moved away from just that plain vanilla, which is a largely commoditized space with very competitive fees, where the scale players are able to compete, fight and survive. But it's increasingly difficult for others to get into that business.

If I were a new entrant looking to get into the ETF market today, I wouldn't be looking to launch an S&P 500 fund or a FTSE 100 fund. I’d be looking at the smart-beta space and thinking about where my skills and competitive advantage fit into that space. And

I’d be looking at the very active end of smart beta, and preparing for nontransparent active. The fees in that active space are going to be significantly different from what we've seen so far.


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