Technology Changing Face Of ETF Biz

Whether you’re a vanilla, smart-beta or active ETF provider, tech is impacting this business.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

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. What was the most surprising finding in this report?

Brashaw: For me, it was how little traction or how little growth folks see over the next five years for automated advice platforms. We're significantly more bullish than the respondents.

The reason for that is that a number of platforms out there tend to be relatively simplistic. They ask a series of questions that get put into one of three or four model portfolios.

Clearly that's not leveraging the challenges investors face. We expect features and functions of those automated platforms to improve, and gain traction not just with millennial investors, but others as well, and drive significantly more growth. Is part of the challenge that some advisors aren’t ready to completely delegate portfolio decisions? Is there a reluctance to fully embrace automation?

Brashaw: Not exactly. There's probably a human condition here, as people are reluctant to adopt new technologies until they're proven, but we're starting to see outperformance from organizations that really adopt these technologies.

When you look though at who's being hired, particularly on the very active end of the asset management scale, it's not CPAs or MBAs, it's rocket scientists, people with physics degrees, mathematics degrees, statistics degrees, etc. That’s where the industry is heading.

It's all going to be about data, and the ability to take data and make it into information. In this business, the term “creating information from data” is fundamentally what we're all about outside of the passive space. And we're going to see increasing amounts of that. "The ETF market is a hard market to be in, but a harder market to be out of." That’s your conclusion. ETFs are booming. What's so hard about being in the ETF market today?

Brashaw: When you look at where fees are and where fees have trended from, and where you look at where the growth in assets is, all of it comes in very-low-cost products. I like to say that almost every dollar in ETFs would otherwise have been in mutual funds or other investment products probably at a significantly higher fee rate.

From an industry perspective, if you're not one of the large players getting scale, competing from a fee perspective is a very hard business to be in. There’ve been many firms that have come in and left in the past few years.

All of this is fantastic for investors, of course. But the other side of the coin for ETF issuers is that that is a difficult business to get right. If you're looking to be in that bucket one—that index replication space—you need scale. You’re competing with the big three—something only a few organizations are able to achieve.

It’s getting harder to make money in ETFs, unless you're in the smart-beta space and you're very innovative and you're able to capitalize on that innovation. In the future, we're going to see other organizations come into the active space, and that is by definition not commoditized, it's differentiated, and for whatever reason, some investors are looking to put money with an asset manager with a proven track record, but there you're going to see a completely different fee structure in the active space.

So there are different opportunities looking forward than there are when we look backward.

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.