Cerulli predicts significant growth in ETF subadvisory mandates

Dec 6th, 2018 | By | Category: ETF and Index News

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ETFs have the potential to become a viable vehicle for fund management firms to deliver active management, leading to new mandates for subadvisors as managers look to deliver increasingly esoteric strategies within the wrapper.

Matt Merritt, Associate Analyst at Cerulli.

Matt Merritt, Associate Analyst at Cerulli.

That is the conclusion of a recent report from global research and consulting firm Cerulli Associates.

“During the past five years, the perfect storm of new ETF issuer entrants, investor preferences, and strong capital market conditions allowed assets within the ETF wrapper to explode,” said Matt Merritt, Associate Analyst at Cerulli.

“Managers are clearly taking notice of this growth, with 89 new firms entering the market over that same time period.”

Although more than three-quarters of total US ETF assets belong to passively managed, market-cap-weighted index products, Cerulli notes that of more than 100 new ETFs that entered the market in the first half of 2018, 68% were either strategic beta or actively managed strategies.

“It is important to note that most new issuers prefer to leverage their—or by extension, their subadvisor’s—active management capabilities and deliver active or strategic beta ETFs,” said Merritt. “This product proliferation is passing through to subadvisors in the form of rapidly accelerating new mandates.”

In 2017, Cerulli estimated that more than 20% of new ETFs were launched with at least one unaffiliated subadvisor, a significant uptick from 2012, when only 6% of new products hired subadvisors. Sub-advised ETF assets have grown by almost 95% since 2013, and the number of subadvised products available doubled in that same time period, as of year-end 2017.

Merritt continued, “As managers continue to shift toward vehicle-agnostic delivery of active strategies, Cerulli believes that subadvisors focusing on best-in-class service and performance will participate in the tailwinds of the ETF market, likely leveraging both existing relationships and potentially developing new ones from a less traditional client type.”

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