Traditional ETF strategists in the US are increasingly challenged by competition, says Cerulli Associates in their latest report.
The firm finds that 77 per cent of strategists rate competition from issuers as the most significant challenge in 2018, up from 33 per cent that expressed this view in 2016.
“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,” says Daniil Shapiro, associate director at Cerulli. “Like issuers offering increasingly niche strategies to stay competitive, strategists may need to specialize to deliver an attractive value proposition.”
Cerulli found that one-third of strategists are considering partnering with an ETF sponsor, while others are either actively developing or are considering developing ETFs.
The firm writes that with the largest issuers developing their own ETF managed portfolios, and increasingly pressuring strategist business models, strategists are looking to either launch their own ETFs or lend their brand to an existing issuer as part of a subadvisory approach.
“Both approaches present challenges for small and mid-sized strategist firms,” says Shapiro. “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, these strategists value support from issuers. Strategists place the most value on introductions to and understanding broker/dealer (B/D) platform gatekeepers and comprehending B/D 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. In light of this, there appears to be both increasing competition and cooperation between issuers and strategists, Cerulli says.
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