Exchange-traded funds (ETFs) are quickly becoming the apps of the investment world – in that there’s one for just about anything.
Witness the launch in the US of the Millennial Generation ETF, tracking an index of companies targeting 18- to 34-year-olds. Never has the ‘smart' in 'smart beta’ been so up for debate.
There’s a serious point here, too. These products may not exist to the same extent in the UK, but the sector is unquestionably expanding at a rapid rate.
Smart beta products, such as those that track different investment styles, are clearly of use. But from a providers’ perspective, you have to question whether each individual offering will be able to reach a critical mass.
This is just one of several challenges facing firms who’ve sought to play a part in the burgeoning market. Passives may be on the rise, but it’s not just certain active managers who may end up left behind.
If buyers judge ETFs by price alone, and prices are all but identical, the bigger brands win
For one thing, the initial rush has seen providers market themselves on the basis of their lower costs – helpful when competing against active funds, but an impediment to taking market share from passive rivals.
If buyers have been taught to judge ETFs by price alone, and prices are all but identical among the main players, what’s to stop the biggest brands such as Vanguard and iShares scooping up all those assets, via either ETFs or index funds?
This may be one motive behind the creation of the ETF Forum, an initiative backed by BMO, ETF Securities, Source and WisdomTree that is designed to educate advisers and wealth managers about the products.
If this brings a greater focus on tracking error, tracking difference and other metrics, then so much the better, but there’s always a risk these things end up patronising buyers or as sales pushes.
The slow progress being made on opening up access to the products must count as an equally significant frustration for providers. FundsNetwork may have just begun offering ETFs, but progress at Cofunds and Old Mutual Wealth is still painfully slow.
As we’ve detailed recently in Investment Adviser, the inability to trade fractional portions of ETFs means one of the fastest-growing segments on all platforms – model portfolios – often ignores the products altogether.
These are substantial barriers to more meaningful take-up. That’s significant at a time when tougher markets mean passive returns and flows will be less impressive.
We’ve already seen signs of a more difficult operating environment – according to consultancy ETFGI, major providers such as db x-trackers, Lyxor and Source have all seen outflows in the first quarter of 2016. For smaller providers, the outlook may be darker still. I’d suggest establishing a presence in the UK market may be a lot tougher than some had bargained for.
Dan Jones is editor of Investment Adviser
