A year removed from a triple-play of intense product and fee competition — Charles Schwab's fee cuts on its exchange-traded fund lineup, the introduction of cheaper “core” products from BlackRock Inc.'s iShares, and an equity index transition by Vanguard Group Inc. to cut fund expenses — the U.S. exchange-traded product market has settled into a somewhat less adversarial mood with a renewed focus on distribution and education for an increasingly diverse audience.
“Much of the waterfront is covered,” said Greg Ehret, global chief operating officer for State Street Global Advisors in Boston. “But there are still opportunities to bring out new products.”
New products and fund sponsors have been much more targeted in the past year. According to research firm XTF Inc., 285 new ETPs have listed and nine new sponsors have entered the market since January 2012, compared with 437 the prior two years. Yet, asset growth in recently launched products pales in comparison with established ETPs.
“The largest issuers are contributing the most to growth, but it only takes one or two good ETFs to have staying power,” said Richard Radnay, chief technology officer of New York-based XTF.
The poster child for being in the right place at the right time in 2013 has been the $11.1 billion WisdomTree Japan Hedged Equity Fund with net flows of $9.3 billion through October, ranking it second only to SPDR S&P 500 ETF. Net flows to the Japan fund accelerated after the introduction of economic policies advocated by Prime Minister Shinzo Abe earlier this year.
Another WisdomTree offering, the WisdomTree Brazilian Real Fund, which launched in May 2008, recently saw nearly $500 million enter the fund (91% of total assets) in one day. Such a move, however, might be temporary as the same fund saw more than $200 million enter and leave on one day each in June and September of 2011, according to IndexUniverse LLC flow data.
Given the unpredictability of market trends and the amount of time it takes to bring new ETPs to market, established sponsors have been loath to close existing low-asset funds or give up on a niche product too early.
Of course, there are exceptions. In October, New York-based Emerging Global Advisors LLC, sponsor of the $1 billion Emerging Markets Consumer ETF, closed 12 latent funds that accounted for only 4% of its total assets under management.
Still, few of the most popular funds by asset growth this year could be described as anything but “plain vanilla” index ETPs. After WisdomTree Japan Hedged Equity Fund, only a few of the top 25 products with significant net flows might be described as more exotic.
According to Alex Papazian, senior analyst at Cerulli Associates in Boston, ETF sponsors are shifting their marketing and distribution efforts toward institutional — away from passive and low-cost and toward a greater message on utility and risk reduction.
“More focused product development efforts are to be expected as we see a natural maturing of the industry,” said Mr. Papazian.
Looking to buck that trend is Fidelity Investments LLC in Boston. Long dormant in the ETF business, the company has introduced 10 sector ETFs, subadvised by BlackRock Fund Advisors. Based on MSCI U.S. sector indexes, the new ETFs are a direct challenge to SSgA's nine Select Sector SPDR funds, which collectively hold $73 billion in assets.
Proponents of indexing have been emboldened by the recently released “Investment Beliefs” from the $272.7 billion California Public Employees' Retirement System, Sacramento. In a document released last month, CalPERS reaffirmed its commitment to indexing saying it: “will use index tracking strategies where we lack conviction or demonstrable evidence that we can add value through active management.”
While many pension funds, including the New York State Common Retirement Fund and the Maine Public Employees Retirement System, already have shifted to indexing, using ETFs in those strategies remains on the margin because of cost and levels of customization.
Although more than 1,500 ETPs are available from 52 sponsors, asset managers continue to focus on education in their marketing efforts to large institutions and large registered investment advisers who might otherwise choose a mutual fund or separate account for their index or passive portfolio.
“We continue to recognize the RIA community in the overall distribution of ETFs,” said SSgA's Mr. Ehret. “We plan to invest in that channel and expand our ability to engage with advisers across the U.S.”
With $1.6 trillion in institutional indexed assets under management (compared with $315 billion in ETPs), SSgA takes a more consultative approach toward institutions on ETF marketing and distribution.
“The cornerstone of all ETF distribution has been education on product structure and characteristics,” Mr. Ehret said.