Clock ticking on new entrants to ETF market

Clock ticking on new entrants to ETF market

The scale of the ETF market is now such that new entrants need to launch products within three years or find them no longer viable.

This is according to Hector McNeil, a former co-chief executive of both Wisdom Tree and Boost ETP, who is now founder of HANetf which provides white label services to companies wishing to launch ETF products.

He said: "As the UK and Europe’s asset management industries continue to follow the path set in the US, ETF growth is outstripping mutual funds, with flows far in excess of sales of legacy products.

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"More and more asset managers are reacting to this shift by launching their own ETFs, with a number of well-known groups launching such products this year alone."

He said it takes two or three years for an ETF to grow in scale sufficiently to become viable and with the spate of current product launches, providers who don't launch soon will find their space in the market taken by a competitor.

Mr McNeil said: "Asset management groups have told us that they are holding back from creating an ETF strategy because they fear cannibalising existing funds, have concerns around the cost of launching, and worry that, with so many ETFs already available, they would struggle to garner interest, but many of these fears are overblown and can be overcome by engaging with the ETF industry more closely."

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

Significantly cheaper than traditional fund management, ETFs are an incredibly fast-growing part of the investment market. Global ETF assets have risen from $800bn (£607bn) 10 years ago to $4.2tn (£3.2tn) at the end of August 2017, according to industry data provider ETFGI.

Mr McNeil said: "An ETF is just a piece of technology which has streamlined the investment process, and essentially digitised investing.

"However, this piece of technology is increasingly important when it comes to distribution, and unless asset managers start to implement such solutions within the next 36 months, it may be too late for them."

Adam Laird, head of ETF Strategy for Northern Europe at Lyxor ETF, said the market for conventional ETFs that do nothing more than track a well known index was already crowded, with fees tumbling.

Perhaps predictably, the rise of passive investment strategies such as ETFs has drawn criticism from active fund managers. Charles Plowden, joint managing partner at Baillie Gifford, said the rise of complex ETFs could be sowing the seeds of the next financial crisis.

Richard Buxton, chief executive of Old Mutual Global Investors and himself manager of the £2.2bn Old Mutual UK Alpha fund, has compared passive investments to Marxism and said they are economically inefficient as they direct capital to businesses which are already the largest, making it more difficult for smaller, more innovative companies to receive funding.