In early January, State Street Global Advisors, which manages $392 billion in SPDR ETFs, launched three actively managed exchange-traded funds with MFS Investment Management. That same week, Emerging Global Advisors and The TCW Group announced plans to market three emerging markets investment-grade bond index ETFs under the EGShares brand with TCW serving as subadviser.
Similar deals among money managers, banks and investment advisers have allowed entry into the exchange-traded product business that might otherwise have been difficult because of the lengthy regulatory requirements to a launch a new fund.
“The overarching goal of these partnerships is to leverage complementary strengths,” said Ben Johnson, director of passive funds research at Morningstar Inc., Chicago.
Other recent tie-ups include BlackRock subadvising on Fidelity Investments' sector ETFs and GSO/BlackStone's role as subadviser to State Street on an actively managed senior loan ETF. That fund closed 2013 with more than $600 million in assets, making it the second largest ETF launch that year.
“As GSO (the Blackstone unit specializing in credit investing) evaluated expanding its reach to more clients, it became clear that the ETF option offered greater transparency and intraday liquidity versus a traditional mutual fund,” said Lee Shaiman, a managing director for GSO/Blackstone in New York.
These partnerships contribute to the efforts of State Street and others to shift the thinking about ETFs from consideration of active vs. passive and “think instead about whole solutions for an investment portfolio,” said Jim Ross, senior managing director of SSgA and global head of SSgA's ETF business in Boston. Mr. Ross highlighted an ongoing affiliation with Nuveen Investments as subadviser to a set of SPDR bond funds first launched in October 2007.
Mr. Ross added that while State Street takes the lead on marketing, sales and distribution for SPDR products, determining the expense ratio for subadvised products is a joint conversation that looks at the competitive landscape among active and passive products through a traditional market cycle.
Also in 2007, Invesco PowerShares introduced a momentum fund based on an index developed by Dorsey, Wright and Associates LLC, a Richmond, Va.-based money management and research company. The two partners increased their ties this past December when PowerShares announced plans to move 10 ETFs to DWA indexes from NYSE indexes.
The willingness to partner on exchange-traded products is largely a function of the dynamics of the market and the cost of building expertise. For example, Fidelity Investments expanded on a previous partnership with BlackRock, offering iShares ETFs commission-free on Fidelity platforms, to include a subadvisory role for the 10 MSCI sector index ETFs launched in October. The funds have attracted $367 million in assets. Nine Select Sector SPDRs from SSgA now hold $79 billion in assets.
The new Fidelity ETFs were designed to complement the company's existing set of actively managed sector mutual funds, now marshaled by SelectCo, Fidelity's Denver-based business unit focusing specifically on sector investing. Fidelity is also planning actively managed bond ETFs outside of SelectCo.
“With our focus on active sector investing, launching a whole suite of broad-based passive products would not have been the right choice,” said Anthony Rochte, president of Fidelity SelectCo.
One of the prime advantages of partnering is time, particularly in the quantitative- and technology-driven winner-take-all realm of ETPs. But for money managers that would prefer not to team up with ETP heavyweights, some smaller firms also come with open arms.
Exchange Traded Concepts LLC, an Oklahoma City-based company salvaged from the shuttering of FaithShares Advisors, provides several money managers and registered investment advisers with ETFs through its already-attained regulatory exemptive relief, the required clearance from the U.S. Securities and Exchange Commission for mutual funds seeking to trade as ETFs.
For example, Horizons ETFs, a unit of Korea's Mirae Asset Financial Group, worked through ETC to launch two funds in the U.S., and VelocityShares, which partnered with Credit Suisse for exchange-traded notes based on the CBOE Volatility Index, works with both ETC and Denver-based ALPS for white-label ETFs.
Garrett Stevens, chief executive officer of ETC, said the business is about much more than just renting relief.
“Our clients are looking for both customer service and product expertise,” he said. The company hosts 10 ETFs and $1 billion in assets through its three series trusts. n