Supplements » ETF Report Sep 2021

ETF roundtable: A revolution in wealth creation

Funds Europe – ETFs continue to grow in popularity and have proven themselves as useful liquidity tools. Should this be of concern for asset managers that don’t already offer them?

Baccash – If you’ve ignored ETFs and they’re eating away at your business, then I think it’s a major area of concern if you’re not already there, because you’ve lost that opportunity. The ETF story isn’t completely written, there’s a lot of room for innovation. ETFs are a natural extension of the app-buying culture that we’ve seen – it has been particularly highlighted during the past 18 months where you have people looking to consume things on their phone and ETFs make a lot of sense from a retail perspective. If you have an investible asset that you think makes sense inside an ETF, you can really package your product around it, as more and more people – especially younger people who are acquiring wealth – become comfortable with ETFs. ETFs fit with their lifestyle habits, so there’s still opportunity to grow.

Redding – Like any business, it’s not that difficult to get in, but it’s not always easy to be successful. People have had a huge advantage when they have their distribution channels in place and have the relationships in place. People 20 years ago looked at it as this was going to disintermediate the business of the asset managers. Now people are looking at it as a different way to distribute the product.

The place that probably needs a little more waking up, quite honestly, is Europe. In the US, because there’s such a big retail market, the ETF providers have done quite a bit there. There are some markets within Europe where they have Byzantine distribution rules and laws and regulations, that they’re probably going to wake up a lot more to the need to get retail more directly involved.

Sanguinetti – We’ve seen a lot of newcomers in the ETF space overall, as well as a trend of mutual funds converting into ETFs, because why not? Why would you hold shares in a fund with so many constraints when you can hold the ETF with so much low cost and better liquidity? It looks like it makes sense for most of them.

In the newcomers that we see, it’s usually a team that has a very good idea but they’ve never done an ETF before, so they have expertise in their area, say crypto or something else, but they have no idea how to bring an ETF to market. It takes a while to get them up to speed and for them to choose which regulation they want to go with. Obviously, for crypto you don’t have that many places in Europe that are facilitating it, reducing choice, but for others it’s a more difficult approach. Also, it increases the cost for the fund when they have to list on various different exchanges.

Aviav – As a new generation of investors matures, the mutual fund experience where you press ‘sell’ on Monday and you hear back the following Friday at what price you managed to sell, so you can receive the proceeds from your sell by the following Tuesday, is just not going to fly any more. Let’s face that. It’s an outrageously bad user experience, not to mention a guaranteed way of losing money in volatile markets. Imagine our kids investing in that – it’s just not going to happen.

That said, it’s very hard for asset managers to decide to jump on the ETF train today. Why? There’s substantial investment and expertise required and the established ETFs now have significant moats around them. The longer an ETF has been around and the more people that use it, the more beneficial it is for other people to use that ETF, due to concentration of liquidity and scale. So, it’s going to be very hard for an ETF newcomer to take market share from an established ETF category. That presents a dilemma for asset managers with no ETF presence today, which explains some of the consolidation we’ve seen in the space. I think we can accept that most managers have let the ETF train pass them by and it’s not clear they can regain the lost time. But there’s another huge train coming into the station now that’s very reminiscent of the ETF train – this one is called ESG, and again it’s not clear to most asset managers whether or how they need to board that.

Sanguinetti – It’s also becoming increasingly difficult for fund managers to justify higher fees, especially when they’re talking to this new generation of investors, because these are people who are now comparing all their investments on their phones with some that cost less than 50 bps, so how do you compare with the mutual funds?

Kooij – We’re very sceptical about the race to the bottom in terms of cost. We don’t like fast fashion, we don’t like fast food, and we don’t necessarily like fast finance either. We have to be very careful that we’re not just cheapening what we’re doing and having a worse result such as hollowing out the industry. Asset allocation and fund management is something that requires a level of subjectivity and human oversight just to ensure that something is not going wrong in the system. If you’re buying a £2 shirt from somewhere, you know the externalities are not being priced in, and it’s the same sort of thing with a 1-5 bps ETF. The externalities in that capital allocation and the negative externalities of allocating that blindly are maybe not being fully priced in.