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BBH US ETF survey reveals enormous further growth potential for the market

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Ryan Sullivan (pictured), Vice President of Global ETF Services at Brown Brothers Harriman (BBH), is responsible for working with new and existing ETF sponsors to develop their ETF product and distribution strategies, and optimise their ETF business. 

The firm has recently published, with ETF.com, its fourth Annual US ETF Investor Survey whose primary findings were that as the US industry matures, investors are employing new ways to use ETFs, including factor based strategies, which have become more attractive as demand continues for smart beta.
 
Sullivan explains that the drive towards low cost investment has been a big contributor to the growth in ETFs. The US’s Department of Labor (DoL) Fiduciary rule, portions of which are due to be enacted in April, requires advisers who oversee retirement accounts to maintain a fiduciary standard for their clients, likely leading to increased usage of funds with the lowest fees, which could be a big positive for the ETF industry.
 
However, its status is now unclear as President Trump signed a presidential memorandum asking for additional reviews and specifically looking for unintended consequences.
 
Sullivan says: “There was no overturning of the rule at this time; DoL was not rescinded. Even with the memorandum, from the ETF perspective, the trends underway continue to compel growth in the ETF market.”
 
However, he says, broader trends that encourage ETF growth exist on their own. “The shift to passive low cost investment vehicles which sees even old school active mutual funds launching smart beta ETFs, the shifts in the distribution landscape within the US and the rise of robo-advisers will continue with or without the DoL rule.
 
“It’s an interesting dynamic, and something that has been gaining attention here, the growth in ETFs in the retail market boils down to a desire for low cost vehicles with liquidity, ease of use through intraday trading and the widespread choice and proliferation of products. These things apply to the institutional market too as institutions also become more cost conscious.”
 
The survey also revealed that close to two thirds of ETF investors could see the benefits of securities lending. BBH is a securities lending agent and wanted to gather intelligence as to whether investors understand the benefits and are comfortable with positions in the underlying portfolios being out on loan, and generating income for the fund.
 
“Among others, ETF firms with a wide range of products are employing lending to help minimize tracking error and improve the fund's returns.”
 
The survey found that smart-beta demand remains strong with 97 per cent of investors planning to maintain or add to their smart-beta positions next year.
 
Sullivan says: “The findings here seem to support growing interest in these emerging index methodologies. Investors are gaining comfort in using multiple smart beta strategies. The advisor responses show they are using smart-beta ETFs like minimum volatility and dividend oriented strategies to achieve certain objectives and exposures in their client's portfolios. These types of factor strategies are an area where we expect to see growth.”
 
The point has not been reached where investors are saying there is too much choice, Sullivan says. “The onus shifts to ETF sponsors to focus on investor education and that was borne out in our survey. Investors are still looking for choice and there is still room on the shelf.”

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