BBH looks to the rest of a year that has had an ‘unprecedented’ start
Brown Brothers Harriman (BBH) senior vice president of ETF investor services, Ryan Sullivan, has reached for his crystal ball and made some predictions for the ETF industry for the rest of the year – a brave initiative given the background of what he calls: “The unprecedented environment that we have found ourselves in.”
BBH is a global custodian and fund administrator, providing back and middle office services to asset managers of all types, and has a dedicated business focused on ETFs, supporting ETF issuers in the US, Europe and Hong Kong.
Part of that work requires consulting with ETF issuers on distribution and product development and bringing insights to clients.
Looking back to early 2020 market volatility, Sullivan comments that across the board ETF trading volumes spiked, especially in March, where ETFs trading volume accounted for 30 to 35 per cent of the total equity volume in Europe and 40 to 45 per cent in the US.
Sullivan also saw huge increases in the creation and redemption activity. “Even with firms like Brown Brothers Harriman, our clients and everyone in a work from home environment everything went pretty well,” he says, noting that there were some market structure considerations in the fixed income space with some persistent discounts between the ETF’s market price and its net asset value (NAV).
“Everything went pretty well so it was promising for ETFs in terms of them being a wrapper that is able to withstand quite a shock to the financial system.”
Themes that BBH is monitoring include the Federal Reserve’s move into buying ETFs. “We are cautiously optimistic about the central bank action,” he says. “The market appears to have already priced it in since the Fed announced the action and its intent over a month ago which seemed to calm the credit markets.”
Sullivan notes that some observers are saying that it was almost enough for the Fed to announce that ETFs would be part of their buying programme, without actually taking action.
“But the fact that they entered and offered a backstop is a promising sign for the fixed income ETF sector.”
Asked if BBH expects another spike of extreme volatility in the latter half of the year, Sullivan says: “It’s an open question as so much is unknown here in terms of what the long term projections are on this global pandemic.”
Another theme that BBH is watching closely is the launch of semi-transparent ETFs – the first two such structures were launched some five weeks ago by American Century Investments.
“They have attracted some assets, and it looks promising for them but it’s early days,” Sullivan says. “We are expecting more semi-transparent launches as we have seen the market rebounding a bit. And we have seen our own client base moving forward with product development.”
Sullivan predicts that with semi-transparent ETFs, we will continue to see launches from existing ETF providers but in addition we will see active mutual fund managers getting into the space with an ETF launch.
“It’s a new chapter in terms of ETF product development,” Sullivan says.
A third theme, and one exclusively American, that BBH is monitoring is the implementation of the Regulation Best Interest (BI) which starts in June.
The Reg BI is an SEC regulation that attempts to improve safeguards for investors through standardising the conduct of broker-dealers and financial advisers in the US.
It is similar to the proposed fiduciary rule, and states that financial professionals make investment recommendations that serve the client first and foremost.
“With that may come subtle changes with how broker-dealers are assembling portfolios,” Sullivan says. “They are used to operating in a certain environment so the market is expected now to focus more on revenue sharing obligations and transparency on incentivising. This could be more fuel on the fire that is advancing the shift for broker-dealers to use ETFs on a wider basis than they had in the past.”
At the same time, the wirehouses and broker-dealer firms in the US are going through a period of rationalising the number of products that they support on their platforms.
“They are winnowing down these menus so the number of products will be shrinking and might provide another inflexion point for us in the US that might further fuel another round of adoption of ETFs,” Sullivan says.