Over the past 10 years the number of Exchange Traded Funds (ETFs) has more than doubled and in that same time period1, assets in exchange traded funds have increased by nearly seven times2. Statistically speaking it appears that now is the optimal time to introduce exchange traded funds – and to be sure there are a number of advantages. However, despite the rapid growth that ETFs have experienced, there are a number of considerations, and several changes are taking place in the distribution landscape that are worth understanding to help guide your ETF distribution strategy.
Fund Distribution Via Platforms
When first introduced, and for the most part up until the last few years, once an exchange traded fund was tradable, by and large ETFs were available on virtually all intermediary platforms. This is still true for many; particularly the custodial platforms, but not all.
Many platforms, generally the larger national wirehouses and broker/dealers will apply minimum criteria for funds to be available to their advisers. For example, size of fund by assets (AUM), performance track record, firm size and trading volume are some of the criteria that are considered by platforms. Many will also apply more deliberate due diligence whereby they evaluate the business need for certain funds or take a deeper dive into the performance or other fund attributes. Many will also require adviser demand before the fund is approved to be available on the platform.
In addition, we are starting to see the introduction of fees being assessed against the fund or fund adviser by some platforms and/or applying on-boarding fees when adding new funds. Often the existence of a holdings shield can trigger fees by the platform.
Broadly speaking, historically, intermediaries have been more financially advantaged by engaging mutual funds versus the economics involved in exchange traded funds. Therefore, it is reasonable to think that we will see increased application of fees and elevated criteria and requirements for inclusion on intermediary platforms.
Identifying Trading Activity
A completely separate challenge for exchange traded funds is transparency into trading activity. Given that ETFs trade on an exchange there is little to no information available pertaining to the individuals or advisers that are actively trading in the fund. Some degree of limited information is available through 13-F reports, which are quarterly reports required by the Securities and Exchange Commission to disclose equity assets under management.
There are also a handful of providers that offer some level of transparency into who is trading the fund, but it is quite limited. This can create challenges, particularly if there are wholesalers that need to be compensated and many third-party marketing firms are reluctant to partner with or actively market exchange traded funds. Another option is purchasing trade detail directly from the intermediary, but this can be very costly.
Overall, there is really no question that exchange traded funds will continue to grow in both quantity and assets. Relative to mutual funds, there are significantly fewer hurdles to address from an intermediary perspective and they still offer a quicker path to accessing advisers. That said, it is important to understand the distribution landscape as it continues to evolve and to be prepared with a strategic distribution strategy suited specifically for an ETF.
If you are considering launching an ETF, please feel free to reach out to us at Ultimus to get more insights regarding best practices for designing an ETF distribution strategy.