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US ETFs increasingly used for sub-advisory mandates, says Cerulli


Recent research from Cerulli Associates has found that exchange-traded funds have the potential to become a viable vehicle for managers to deliver active management. This could lead to more mandates for sub-advisers as managers look to deliver more esoteric strategies within the wrapper.

“During the past five years, the perfect storm of new ETF issuer entrants, investor preferences, and strong capital market conditions allowed assets within the ETF wrapper to explode,” says Matt Merritt, associate analyst at Cerulli. Total ETF assets currently stand at USD3.7 trillion, a growth rate of 141per cent between Q3 2013 and Q3 2018. “Managers are clearly taking notice of this growth with 89 new firms entering the market over that same time period.”
“Currently, more than three-quarters of total ETF assets are passively managed, market-cap-weighted index products. But, it is important to note that most new issuers prefer to leverage their – or by extension, their sub-adviser’s – active management capabilities and deliver active or strategic beta ETFs,” explains Merritt. In the first half of 2018, more than 100 new ETFs entered the market, with 68 per cent of them being either strategic beta or actively managed strategies.
Merritt adds, “This product proliferation is passing through to sub-advisers in the form of rapidly accelerating new mandates.” In 2017, Cerulli estimated that more than 20 per cent of new ETFs were launched with at least one unaffiliated sub-adviser, a significant uptick from 2012, when only 6per cent of new products hired sub-advisers. Sub-advised ETF assets have grown by almost 95 per cent since 2013, and the number of sub-advised products available doubled in that same time period, as of year-end 2017.
“As managers continue to shift toward vehicle-agnostic delivery of active strategies, Cerulli believes that sub-advisers focusing on best-in-class service and performance will participate in the tailwinds of the ETF market,” continues Merritt, “likely leveraging both existing relationships and potentially developing new ones from a less traditional client type.”

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