Despite declining fund use among advisers, traditional mutual fund managers, particularly large fund complexes, are positioned to play a leading role in the next phase of the exchange-traded fund revolution: the rollout of active ETFs.
This and other findings are included in a report recently released by Cogent Research, a Market Strategies International company. The report, Advisor Brandscape, is conducted annually and is based on a survey among a nationally representative sample of over 1,700 financial advisers in the US.
In the last six years, the proportion of advisers selling ETFs has increased dramatically, from less than half (46 per cent) of advisers in 2007 to nearly three-quarters (73 per cent) who use them today. In that same period, advisers’ allocations to ETFs have more than doubled, from five per cent in 2007 to 12 per cent in 2013. According to Cogent, most of the ETF gains thus far have come at the expense of mutual funds. Furthermore, for the first time ever, advisers now say they are as likely to invest new dollars in ETFs as they are to invest in mutual funds. However, as interest in active ETFs builds, it appears that traditional fund managers are well positioned to capture (or retain) a portion of future active ETF flows.
“While provider preferences certainly exist in the ETF category, many advisers remain relatively agnostic when it comes to choosing ETFs, particularly those tracking broad indexes,” says Meredith Rice, senior product director and author of the report. “However, the rules of engagement will change significantly when it comes to how advisers approach selecting actively managed ETFs. And that is where traditional active managers, even those late to the game, may find some real traction.”
Citing the new Adviser Brandscape report and additional qualitative research conducted by Cogent earlier this year, Rice notes that factors such as the track record of the manager, the composition and expertise of the investment team, and the overall reputation of the firm weigh more heavily in advisers’ decision making when they consider active ETFs. As a result, traditional active managers who are already known and judged by these criteria today have a significant advantage, especially in cases where the new product is a “clone” of a mutual fund that already exists.
While these findings may come as good news for active managers considering entry into the ETF marketplace, a potential downside is that advisers, while they are open to paying more for actively managed ETFs, expect these products to be less expensive than their actively managed mutual fund cousins.
“The potential pricing issues will certainly give some mutual fund companies pause,” says Rice. “But they need to look back over the past six years of ETF history, and ask themselves if they are willing to pass on the next wave of ETFs.”