Asset managers can no longer afford to avoid ETF market

The exchange-traded fund space is nothing if not creative and dynamic. Where else would you expect to find something like the Direxion Work From Home ETF (WFH)?

The brand-new fund that focuses on the stay-at-home economy is just the latest example of where sponsors can and will go for market share.

But that same exchange-traded fund space that has targeted various niches with Restaurant (BITE), U.S. Global Jets (JETS), and PureFunds ISE Cyber Security (HACK) is suddenly attracting large asset managers that have until recently shunned the business.

Wells Fargo & Co., the nation’s fourth-largest U.S. bank by assets, recently filed with the Securities and Exchange Commission to join the $4.5 trillion ETF industry with some products of its own. The Wells Fargo filing follows Dimensional Fund Advisors, BNY Mellon, and T. Rowe Price as major asset managers jumping into the market in 2020.

“We think this is a very positive development for investors because they now have added choices,” said Tim Coyne, who was hired away from ETF giant State Street Global Advisors in October to head up T. Rowe’s ETF business.

“This is about expanding our reach and connecting with new investors who have developed a preference for ETFs,” Coyne added. “We’ve spent a lot of time building out our capabilities to launch ETFs, and we’re on that pathway to launch products. But we’re playing the long game and looking to build our diversified product suite.”

While T. Rowe appears to have aspirations of taking a piece of the growing ETF pie, it is debuting with four semitransparent funds that represent the newest twist on ETF investing. “This is the next big chapter being written in ETFs,” Coyne said.

The unique semitransparent wrapper that allows actively-managed ETFs to only disclose their portfolio holdings on a quarterly basis is still a fledgling subcategory with only a handful of funds on the market, so far.

But not all the ETF newcomers are initially embracing the semitransparent wrapper, which suggests these holdout asset managers are realizing they can no longer avoid the appeal of ETFs, especially by younger investors.

“I think it has to do with the growing realization that ETFs are increasingly the format of choice for investors and financial advisers,” said Morningstar fund analyst Ben Johnson.

SWELLING APPETITE

While ETFs are predominately passive index strategies, especially on the equity side, Johnson said the swelling investor appetite for ETFs is more about the wrapper, versus the older-school mutual fund, than it is a case of passive versus active investing.

“It is all about the way financial advisers, and RIAs in particular, want to use ETFs,” he said. “All you need is a brokerage account to plug into ETFs, and it’s also more efficient from a transaction point of view because advisers are still paying ticket charges to transact mutual funds in most cases.”

Trillion-dollar asset management conglomerates don’t typically turn on a dime toward the next hot target, but it is safe to assume the wave of zero-fee ETF trading platforms that swept the industry over the past year played a role in pushing reluctant asset managers toward ETFs.

“Asset managers are increasingly coming to grips with the reality that they need an ETF presence as advisers are focused on the more tax efficient products for asset allocation and liquidity purposes,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“With the growing adoption of active ETFs these firms can put their strategies in an ETF wrapper and hope to retain and even win back some of the lost business,” he added.

ZERO FEE

BNY Mellon’s move into the ETF space with a suite of eight funds in April was interesting on a couple of levels.

Two of the ETFs launched by the $2 trillion asset manager come with a zero-expense ratio, which is not just an eye-catching teaser rate, according to Stephanie Hill, managing director and co-head of the asset manager’s index business.

“This is a true zero fee,” she said. “This isn’t zero with a waiver or because you have certain assets with us.”

The other unique aspect of BNY Mellon’s launch of a branded ETF suite is that it already subadvises on about $34 billion worth of ETF assets, making it the largest ETF subadviser.

In terms of why BNY Mellon thought now was the time to launch its own ETFs, Hill took at gentle swipe at the competition.

“Some of the large players are gaining more and more of the market share,” she said. “Clients are looking for globally diversified players to diversify some of their exposure.”

According to Rosenbluth, the five largest ETF providers including BlackRock iShares, Vanguard Group, State Street Global Advisors, Invesco, and Charles Schwab Corp. are responsible for more than 90% of the asset flows.

But that doesn’t mean there isn’t room for more competition.

“JPMorgan and Goldman Sachs have shown that firms can be later to the ETF party and have success,” he added. “JPMorgan is now in the top 10 and Goldman is just outside of it.”