ETF Strategist Space Struggling To Grow

ETF Strategist Space Struggling To Grow

The ETF industry is growing by leaps and bounds, but ETF strategists continue to struggle to gain market share. 

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Everyone loves to talk about the ETF market’s impressive growth rate, year after year. Assets under management are nearing $3 trillion in the U.S. alone, and in the first quarter of this year, ETFs saw record-breaking inflows of $135 billion following record net creations in 2016.

This is an industry that’s in the business of breaking records.

But there’s a segment of the ETF industry that’s not enjoying its share of this blockbuster asset growth story: the ETF strategist space.

Market Share Eroding

In many cases, some of these strategists offering ETF portfolios to advisors and investors are actually struggling to grow, if not altogether losing market share.

At the end of 2016, ETF strategist portfolios commanded about $85 billion in assets spread across 881 different portfolios, according to Morningstar data. (That’s the most recent assessment of this universe, but it’s important to note that it’s self-reported data.)

That total represents, in a way, a recovery from year-earlier levels. At the end 2015, that number was $73 billion across 755 portfolios. AUM growth year-over-year is a healthy 19%.

But consider that 126 portfolios were added to the universe in one year, per Morningstar data, and total assets under management, while larger, aren't exactly a new milestone. We had been here before, and we had seen larger AUM totals than this.

Back in March 2015, or two years ago, ETF strategists already managed about $85 billion—like today—and they did that across 700 portfolios, or 181 fewer portfolios than today.

Look at these industry numbers provided by Morningstar—ETF strategist AUM at the end of each calendar year: 

Calendar YearETF Strategist AUM (B)

Source: Morningstar

The needle really isn’t moving much in this segment of the ETF industry, and for a few good reasons.

Challenge 1: Fee Compression

ETF wars are highly publicized in the ETF space. ETFs are cheap, are getting cheaper and investors like it. ETF issuers have faced the pressure to lower costs whenever possible, particularly in plain-vanilla strategies.

And in the advisory space, expectations of low returns since the 2008 financial crisis have put significant pressure on advisors to reduce fees—at the end of the day, no one wants to pay a lot to get so little. Rethinking value propositions is a common topic among advisories these days.


That widespread fee compression has impacted ETF strategists. Estimates vary, but some say ETF strategist fees have lowered on average from 0.80% to 0.30% in the past five years, all the while watching their profit margins shrink.

In some cases, strategists have seen their fees slashed in half, and today are unable to charge above the “teens,” one said. Layoffs have taken place in many shops. Making money as an independent ETF strategist is getting more difficult.

As an investor, you’d pay both the strategist fee and the underlying cost of the ETFs in the portfolios—which brings us to the second challenge ETF strategists are facing.

Challenge 2: ETF Issuers In The Same Playground

Many ETF issuers are now offering their own model ETF portfolios, and often for free. If you are an investor, you would pay only the underlying cost of the ETFs themselves.

Out of the 881 portfolios tracked by Morningstar, nearly 100 are offered by ETF issuers, and these portfolios are seeing an acceleration of growth. Today they represent about 18% of the total AUM in the space, or just over $16 billion in combined assets.

For example, Vanguard offers 44 ETF portfolios commanding $5.23 billion in assets. The biggest portfolio, the global, strategic Vanguard CRSP 60% Equity/40% Fixed Income, has $987 million in AUM.

Vanguard’s ETF portfolios don’t charge a strategist fee—they are free. Investors pay only the expense ratios of the underlying ETFs included in the portfolio, which, in the case of Vanguard, average 0.07% to 0.11% depending on the model, according to the company.

Not only are Vanguard’s ETF portfolios free of charge, but the cost of the underlying funds is significantly lower than the industry average of 0.53%.

Big ETF Issuers In Space Attract Assets

It’s no surprise that Vanguard has the largest ETF-issuer footprint in the ETF strategist space today. But it’s not the only one.

BlackRock, too, offers 22 portfolios with some $4.2 billion in combined assets—and growing. State Street Global Advisors offers five portfolios, with more than $4 billion in assets. Charles Schwab manages 12 ETF portfolios with about $4 billion in combined assets. And the list goes on. There are nine ETF issuers claiming a stake in this universe today.

“Many smaller operators simply don’t have the scale or the resources to compete with the ETF issuers, who for their part are increasingly less worried about being seen as direct competitors to the independent ETF strategists,” said Ben Johnson, director of global ETF research for Morningstar.

The advantage ETF issuers have in this space is that they populate these free- or super-cheap ETF portfolios with their own ETFs, making money in the underlying cost of the funds. That’s a luxury independent ETF strategists, often brand agnostic, don’t have.

“ETF managed portfolios are an opportunity for ETF and fund providers like Vanguard to not just offer stand-alone products, but share their portfolio construction thought leadership and best practices,” said Evan Wolf, head of investment services in Vanguard’s Financial Advisor Services division.

“Managed portfolios have been a very popular solution, as they allow firms to focus on other challenges, like controlling risk, streamlining the portfolio management process, and allowing their financial advisors to focus on relationships with their clients and the holistic financial planning process,” Wolf added.

ETF issuers have awakened to the opportunity in this space, and independent strategists are increasingly challenged to compete.


Challenge 3: Investor Confidence

The third challenge ETF strategists face is one less quantifiable: investor confidence.

There have been a few “bombs” in this segment in recent years that are now plaguing just how much risk advisors are willing to take with independent firms, and how much they are willing to pay.

Case in point was F-Squared’s epic demise when the company was one of the largest ETF strategists in the marketplace. Embroiled in a regulatory scandal that dragged on for nearly two years, the Wellesley, Massachusetts-based giant that once commanded nearly $22 billion in ETF portfolio assets fell into bankruptcy in 2015.

Not long after, Good Harbor, one of the biggest ETF strategist darlings at one point, was another one to fall from grace following poor performance in its tactical approach, bleeding billions of dollars in a short period of time.

Struggles at these and other firms in recent months have helped fuel what is today a “serious hangover” in the ETF strategist industry, as one strategist put it.

These issues have tainted investor confidence and their willingness to pay up for third-party strategist services.

The Future

Growing a business in this pocket of the ETF universe is not as easy as it was, say, a decade ago, when the whole idea of a third-party managed ETF portfolio was novel and new.

Today it’s more difficult to differentiate yourself in an ocean of boutique shops. It’s more difficult to charge for what, in many cases, is now a commoditized asset—a strategic ETF portfolio. And it’s more difficult to offer value-add services as advisors become more proficient in the use of ETFs, and are more capable of building portfolios themselves.

However, talking to ETF strategists, some weary from the punches, you still get a sense that they see opportunity ahead as ETFs grow in usage, and the trend of outsourcing portfolio management remains strong among the advisory community.

The catch, as some put it, is finding a way to gain enough scale to make up for lower—and lowering—fees, offering value no one can match.

This is a segment of the ETF industry that’s faced with challenging growing pains.

Contact Cinthia Murphy at [email protected]


Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.