The Wizards of ETFs – Behind the Curtain (1/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference entitled ETFs: To Develop or Not Develop?  This is part one of a two-part series.  You can jump to part two by clicking here.


  • Benjamin T. Fulton, Managing Director of Global ETFs, Invesco Powershares Capital Management, LLC


  • Sam Turner, Director of Large Cap Portfolio Management at Riverfront Investment Group
  • Jill Iacono Mavro, Managing Director, Head of National Accounts, State Street Global Advisors – $337 billion in ETF assets globally, 94% in US, SPY launched in 1993
  • Dodd Kittsley, Senior Product Manager & Head of ETP Research, iShares

How has the trend of advisors shifting towards Rep as Portfolio Manager (RPM) changed your business model?

Turner believes RPM is more of a challenge than a threat since it is the end client experience that matters. Competition from RPM raises the bar, with each crisis causing a shakeout of weaker products and players. The next crisis may not be a market downturn but could be a repeat of 2009 when many government central banks were trying to stimulate their economies through quantitative easing, he said.

Many of the advisors who Turner has spoken to are over-weighted in cash because their client’s are nervous. If the market continues its current upswing into 2013, then this lack of participation could be a risk for these advisors, he warned. Their clients may fire them because they were too cautious.

RPM has also been a huge growth engine outside the US, Kittsley stated. Financial transparency rules enacted in the UK will be a huge catalyst for growth in that market. ETFs are well-suited for managed books of business.

StateStreet’s distribution efforts started in the RIA segment, Mavro explained. They treat it more like an institutional service model. iShares and PowerShares have been focusing on RPM for many years and it has become a differentiator for them on larger platforms Regulatory reform targeting advisors running discretionary portfolios often result in more outsourcing, which benefits firms like Riverfront, she claimed.

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How important is it to be first to market with new ETF products?behind-the-curtain

Being first to market with a new ETF product is helpful, but not as important as it used to be, both Mavro and Kittsley agreed. This has changed due to the increased due diligence requirements since the financial crisis. Clients are evaluating the total trading costs, as well as the underlying index and its liquidity when making investment decision, Mavro added.

According to Turner, when they design new ETFs, obtaining the right exposure is their #1 priority. they’re ok being the first ones into a new product if they have a fundamental conviction that the investment theme is sound and they plan to hold it for multiple years.

There can be benefits of being first if there is pent up demand for the product, Kittsley said. There is a lot of room for niche products in between current solutions for standard market categories, he noted.

Do ETFs become obsolete due to flawed benchmarks? Is there a shelf life to certain indexes?

BlackRock is the world’s largest investment manager with the world’s largest ETF product line.

Indexing has continually evolved over time and has accelerated with the growth of ETFs, Kittsley proposed. While there are 1,500 ETFS there are literally millions of indexes that are being calculated on a daily basis. Not all of them can have merit. But in order to determine which ones are really useful, he recommends evaluating how representative the index is and how well it aligns with the client’s objectives.

Are active ETFs (non-transparent with true manager discretion) better than passive?

Many strategy-based, equity and dividend income strategies have really taken off recently, Kittsley observed. low volatility strategies have also had a lot success and they’ve seen large flows into those products. One of the reasons for their success is that they have a very high level of transparency, so investors know what they are buying. if there is an esoteric index out there that is too complex to understand, then it will be impossible to know that the strategy is trying to deliver and an actively managed ETF would be a better solution, he advised.

An fund of funds approach is another option that combines active management with passive ETFs, Mavro proposed. State Street launched three of these products back in April, she reported.

How is consolidation affecting the industry?

Looking at statistics from 2011, there twice as many mutual funds (580) than ETFs (226) created, Mavro reported. In the same period, the number of liquidations were only 15 ETFs versus 194 mutual funds. What are the underlying reasons behind new entrants, she asked? Some new ETFs are being built not to be sold to investors but to be acquired by a larger provider. Others are just being used as placeholders until the firms figure out what they want to do.

The market is growing more and more to be dominated by the “Big Three”, according to Lipper:

BlackRock Inc.(BLK), State Street Global Advisors and Vanguard Group offer ETFs in virtually every major asset class. Together, the Big Three have captured 77.6 percent of all new investor money that has come into the U.S. ETF market this year, up from 60.5 percent in 2011…

As an ETF manager, do you become leery of an ETF provider’s new products after they close other products?

Invesco has closed about 30 ETFs over the past few years, but has also launched about the same number of new ones over the same period, according to Fulton.

ST – there could be some providers, spaghetti on the wall. ETF providers usually provide 60 days notice when they are closing a fund. Clients don’t notice. We’re able to redeploy easily.

A lot of attention is often given to fund closures without putting them in context, Kittsley suggested. This year there were 101 ETF closures, globally, represting just over $1 bil in AUM. This seems like a lot until it is compared to the 506 new ETF products that were launched this year that brought in a combined $20 bil AUM. That’s a 20-to-1 ratio! The growth in ETFs is not moderating, as some people are suggesting. It is not a mature industry and there is still a lot of growth and innovation ahead, he predicted.

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Distribution Strategy for Managed ETF SolutionsETF Strategy Group (ESG). This document is a resource to help ETF Strategist investment managers better understand the distribution landscape, aid them in making product development decisions necessary to support broad market distribution, and provide guidance about how to organize and implement a productive distribution strategy.
Fund firms cut back on new ETFs, closing more – Fund companies are growing more wary of introducing new exchange-traded funds, and more willing to kill those that have not caught on, as they grapple with a price war in an overcrowded $1.2 trillion market dominated by the three largest providers.
ETF Stats for October 2012 – Another Record Number of Closings – The year-to-date closure count of 89 (as of October 31) is already a calendar-year record, and at least eight more ETFs will be lights out before the end of the year. October marks the first time ETP listing counts have declined for three consecutive calendar months. The month ended with 1,439 listings, consisting of 1,234 ETFs and 205 ETNs.

This is part one of a two part series. Look for part two coming soon! Meanwhile, check out some of our other wealth management content:



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at