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US ETF industry faces new challenges

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Despite the US ETF industry going over USD4 trillion in assets this summer, new challenges are emerging, says Denise Krisko, President & Co-Founder of Vident Investment Advisory (VIA).

New ETF issuance is down at this point and Krisko believes that one of the top reasons for this may be that some firms are waiting for the SEC’s ETF Rule 6c-11 to be passed.
VIA offers sub-advisory services to the ETF industry, with 41 ETFs with an aggregate total of around USD4.5 billion in assets under management.
 

“ETF issuance has definitely slowed in our business and industry wide,” Krisko says. The SEC governmental shutdown earlier this year slowed some launches up, she observes. “But what are the reasons behind the slowdown now?” she asks.
 
She also believes that the ETF market is more saturated with most segments offering at least one ETF, if not more. “There aren’t many new ideas or strategies that are relatively unique,” she says. “It’s getting more challenging  to come up with a new idea or a new take on an old idea. There’s still room but it’s slowing down.”
 
She also believes that potential new ETF providers are becoming more aware of what it takes to be an ETF adviser and the application for exemptive relief process seems ever more daunting.
 
“Back in the day, it took a lot of time and money just to get exemptive relief, often several months and a couple  hundred thousand dollars to get exemptive relief for even just an index ETF,” she says.

“That has become easier as the time and cost has come down significantly, so the barriers for entry are a lot lower but a certain giddiness has taken over. It was fantastic for innovation but a lot of people came into the space not understanding the role of the adviser and the cost and the need to break even,” Krisko says.
 
The SEC opened the reformative process on applying for exemptive relief in 2018 but there has been no news on when it might implement the ETF rule  recently.
 
Krisko has also observed that ETF providers of all sizes have been liquidating ETFs, cutting out products that aren’t paying their way or earning their keep, perhaps part of a natural evolution and maturation of the ETF industry.

VIA provides sub-advisory services to the ETF industry. Krisko was running a large portfolio management team at Bank of New York, advising on over 100 ETFs, but in this role she continues to sub advise but VIA is able to be agnostic as to the service providers involved.  This allows for significant flexibility and a turn-key solution for many clients.
 
“At this firm we work with six different custodians, several different index providers and every combination of service providers,” she says. The firm also works with European white label firm HANetf as sub-adviser to UCITS.
 
“Large firms come to us who want to outsource their portfolio management and trading or smaller firms come, who don’t have the resources and don’t what to build the infrastructure. We also get asset managers who want to launch an ETF but have no experience in the ETF industry.”
 
Looking forward, Krisko believes that the ETF industry launches will pick up again, particularly once the 6c-11 rule has been passed. “That will normalise the industry,” she says. “It will level the playing field so everyone will be on the same set of rules, especially active funds which can then use custom baskets to allow for more tax efficiency.”

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