Over three-quarters (77%) of ETF strategists have rated competition from ETF issuers as the most significant challenge to their businesses, according to global research and consulting firm Cerulli Associates.
That proportion is up significantly from 2016 when only 33% of ETF strategists rated issuers as their biggest threat.
The survey results reflect the proliferation of ETF managed portfolios and similar services offered by issuers which aim to provide clients with a simplified way of investing across their products, and, in turn, raise assets.
These issuers can generally provide a compelling cost proposition by leveraging on the cost synergies of using their own ETFs in the portfolio construction process.
The competition is presenting itself in many different forms and guises and is being felt in all major markets where ETFs are established.
For example, in May 2019, BlackRock launched a range of actively managed multi-asset portfolios in the UK, branded ‘MyMap’, built exclusively using iShares ETFs and passive index funds. The range debuted with four portfolios that cater to different risk appetites by targeting defined volatility bands. Each portfolio comes with fees of just 0.17% which includes the cost of owning the underlying ETFs and passive funds held in the portfolio.
BlackRock’s great rival, Vanguard, is also engaged in the space. As well as offering commission-free trading on its entire ETF line-up, it offers an ETF managed portfolio service that, as of the second quarter of 2018, had nearly $12.7 billion in assets across 44 strategies. This is AUM that might otherwise be managed by independent ETF strategists.
Similarly, in August 2018, Horizons ETFs launched a pair of asset allocation ETFs in Canada that charge zero direct management fees with investors only required to pay the management fees on the underlying Horizons ETFs within each portfolio.
And more recently, JP Morgan Chase unveiled an automated digital wealth management service called ‘You Invest Portfolios’ which waives the fees on the underlying ETFs and simply charges a flat annual fee of 0.35%.
Independent ETF strategists struggle to compete at these price levels.
Daniil Shapiro, Associate Director at Cerulli Associates, commented, “The fees that strategists charge for their asset allocations can appear excessive when compared with the zero-cost allocations frequently available from issuers that generate revenue from the expense ratios of their underlying ETFs.
“Like issuers offering increasingly niche strategies to stay competitive, strategists may need to specialize to deliver an attractive value proposition.”
In response to the growing threat from issuers, Cerulli found that one-third of strategists are considering partnering with an ETF sponsor as part of a sub-advisory approach, while others are either actively developing or are considering developing their own ETFs.
However, Shapiro notes that both approaches present challenges for small and mid-sized strategist firms.
He said, “Launching an ETF is a costly effort and success requires existing clients and distribution capabilities, while partnering with an existing issuer may lead to a more expensive product.”
However, Cerulli believes such partnerships are likely to become increasingly important, especially as the two business models can clash, with issuers launching managed portfolios and strategists launching ETFs.
Despite their growing importance in the ETF space, Cerulli highlights that strategists value support from issuers. Strategists place great value on introductions to and understanding broker/dealer platform gatekeepers and comprehending platform due diligence processes, which are areas in which large issuers may be able to provide support. In addition, sales support from issuers may dissuade strategists from launching their own ETF products.