Money managers

Managers finding new ETF niches to stake their claims

Over the past several months, U.S. money managers traditionally associated with active portfolio management for both retail and institutional clients have made their exchange-traded fund aspirations more pronounced.

Many are siding with murkily defined “smart beta” index strategies, while others are pinning their hopes on a new product structure known as exchange-traded managed funds.

No matter the approach, diversified asset managers are pressing their causes to bring even more options to the $2 trillion U.S. ETF market, awash with nearly 1,800 products, according to research firm XTF Inc., New York.

While “plain vanilla” index products are still dominated by Vanguard Group, the iShares unit of BlackRock (BLK), Inc., and State Street Global Advisors, the $450 billion smart beta category, according to Morningstar Inc., has emerged as a safe proving ground for recent entrants Goldman Sachs Asset Management and John Hancock Investments.

In late September, GSAM, New York, launched the first two of six ETFs. Branded “ActiveBeta” and self-indexed, GSAM targeted two competitive areas of the ETF market: large-cap U.S. equity and diversified emerging markets. Yet the company broke with convention by offering its large-cap fund at a cost of 0.09%, more in the neighborhood of market cap-weighted index products.

Within days, the emerging market ETF welcomed a little more than $150 million, reportedly from just one institution on one day. In less dramatic fashion, the U.S. large-cap ETF has also had six days of positive net flows, according to ETF.com, San Francisco.

One multibillion-dollar institutional investor that previously used ETFs for transition management between active managers said it has invested in GSAM's large-cap ETF as a “potential longer-term opportunity” and used it replace a portion of another large-cap ETF that it already held.

“We made a strategic decision to compete on price,” says Michael Crinieri, global head of ETF strategy for GSAM. “Taking price out of the equation allows clients to consider these as a replacement for traditional market-cap-weighted funds.”

“Brand equity makes a difference, but the manager has to be willing to support the products,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ in New York. “Aligning with smart beta allows Goldman and others to tap the market in an "active-like' way.”

In contrast to GSAM, J.P. Morgan Asset Management (JPM), New York, which launched its first ETF in June 2014, has gathered $190 million across its four funds.

The entry of John Hancock Investments, a unit of John Hancock Financial, Boston, made less of a splash in assets but delivered a heretofore missing brand to the ETF landscape. The six funds launched in September are based on indexes created by Dimensional Fund Advisors, Austin, Texas, known for its stable of academics and adherence to active factor investing.

“This is the right entry point,” said Andrew Arnott, president and chief executive officer of John Hancock Investments. “Partnering with DFA allows us to be differentiated. You can't add value by replicating commodity indexes.”

The net expense ratios of John Hancock ETFs range from 0.35% to 0.50% and hold roughly $7.5 million in assets each.

Another way into the ETF market is through acquisition. OppenheimerFunds purchased VTL Associates, Philadelphia, adviser for RevenueShares ETFs, in September. And New York Life Investment Management has now integrated its April purchase of IndexIQ into its Mainstay retail alternatives brand.

“It's still a very different model for distribution than the traditional fund business,” said Adam Patti, IndexIQ CEO.

Another multiboutique manager, Legg Mason (LM) Inc. (LM), Baltimore, announced its forthcoming ETFs will be managed by quantitative institutional manager QS Investors, which Legg Mason acquired a year ago.

These market entries are all playing within the daily disclosed forum of indexed equities.

Few established asset managers have been willing to approach the currently required transparency of actively-managed ETFs. For example, a nod to active management by Massachusetts Financial Services and SSgA has attracted few investors. Three “systematic equity” ETFs hold just less than $20 million.

Other active managers are looking to an entirely new structure for exchange distribution of their services. Championed by Navigate Fund Solutions, a unit of Eaton Vance (EV) Corp., Boston, exchange-traded managed funds, branded NextShares, will trade throughout the day on the Nasdaq Stock Market and are expected to launch this quarter. Unlike current requirements for actively-managed ETFs, NextShares will not have to disclose the entire portfolio. n

This article originally appeared in the October 19, 2015 print issue as, "Managers finding new niches to stake their claims".