[The $7.1 trillion U.S. ETF industry (as of 3/31/22) is far from being a mature market. First developed in the 1990s to provide access to passive index tracking and sector funds, the ETF universe has been in perpetual evolution. Now with recent regulatory changes lowering marketplace “barriers to entry,” ETF issuers are being invited to bring to market more creative and unique approaches to the ETF structure. Originally driven by generally lower costs, easier access and tax advantages, ETFs now represent a broad engine for financial services innovation.
Another growth dynamic may also be added to this already exponential ETF growth trajectory with Guinness Atkinson and Dimensional Funds leading the way in converting their mutual funds to ETFs. Bloomberg Intelligence estimates active managers could bring $100 billion to the ETF industry through mutual-fund conversions.
This dynamic growth and wide variety of intriguing new and re-engineered products being introduced are substantially increasing competitive pressures and presenting serious challenges for ETF issuers. To breakthrough today’s increasingly crowded marketplace, these challenges reside around three factors: Access, Cost, Growth. Ultimately, growth cannot be achieved without access to platforms and advisors and the cost of the internal resources needed to effectively reach your client base can become prohibitive. Traditional distribution resources and personnel requirements will need to be rethought and reformulated.
In order to learn more about these challenges and explore possible solutions, we went to Institute member Jillian DelSignore, managing director, head of advisor sales at FLX Networks – a community platform revolutionizing the engagement experience for asset managers, wealth management firms and financial advisors.]
Bill Hortz: Can you please give us a brief lay of the land of where we are now with this ever-evolving ETF marketplace?
Jillian DelSignore: ETF asset growth, product innovation, and the rate of new launches are truly impressive. 2021 was a record year as global ETF assets surpassed $10 trillion and saw flows of over $1 trillion. There has also been an increasing rate of new ETF launches – 299 in 2020, 459 in 2021, and 146 so far this year. With much of the attention and usage focused on passive index strategies, it is interesting to note that active ETFs now represent over 29% of the universe utilizing a wide variety of investment strategies from adaptive sector rotation to volatility management to fixed income diversification, among many others. ETF.com, ETF Trends, and ETF Database are great sources of information to follow the ongoing developments of this marketplace.
Hortz: What do you see as the most interesting innovation trends in the market today?
DeISignore: Some of the more interesting product development is coming in areas like ESG and impact investing, outcome-oriented strategies, and thematics. Thematics, in particular, have ballooned in the last few years. You see issuers developing ETFs that offer investor access to exposures in blockchain, emergent food themes, and others impacted by consumer trends and demographic shifts. You also have active ETFs, both fully and semi-transparent, continuing to evolve and grow market share.
The last trend I will note is model portfolios increasingly utilizing ETFs. Models have been a trend for a number of years and they continue to accelerate as advisors and wealth management home offices look to provide turnkey investment solutions. Not to mention issuers looking to create model portfolios to help commercialize their ETFs.
Hortz: Earlier this year, you interviewed 30 ETF managers and compiled a research white paper “The Changing Landscape of ETF Distribution”. What were some of the main take-aways?
DelSignore: There were a few key takeaways from the report.
The first takeaway was the realization that an issuer must bring more than just product. Having a unique product with great performance are just table stakes at this point. Advisors are working with a fewer number of partners and are looking for more support from those partners. The conversation has evolved to helping advisors understand how an ETF is differentiated, as well as how precisely to use it, where it fits in the portfolio, and other portfolio construction related support.
ETF issuers need to commit time and money to provide resources, education, detailed portfolio construction commentary, share research, and offer due diligence support. These value-add offerings can provide strong differentiators that advisors and their clients are looking for as they are navigating the increasing number of new and existing ETF products.