ETF Product Design and Distribution Trends

It’s no secret that exchange-traded funds (ETFs) are becoming a significant part of the investor toolkit — and with increased adoption comes innovation. For today’s asset managers, it’s more important than ever to stay up-to-date on the latest trends shaping the ETF landscape.

To that end, NICSA members received an in-depth look at ETF product design and distribution trends during a recent #WebinarWednesday event on the topic moderated by Paul McMillan, Managing Editor at Fund Intelligence.

The panel also included thought leaders from Legg Mason, UBS, and WisdomTree. Tim Gilligan, Director, Head of Wealth Management ETF Sales at Legg Mason, said active ETFs, in particular, are generating a lot of headlines.

“The ETF has been of the most innovative vehicles that has impacted the asset management industry over the course of the last 20 years,” Gilligan said. “Primarily, the ETF vehicle has been a story of passive management, and that has been almost exclusive to market cap passive, although certainly the smart beta world over the last five years has taken hold.”


Gilligan provided an overview of Legg Mason’s innovate foray into the nontransparent active ETF space via Precidian Investments, which is working on gaining approval from the U.S. Securities and Exchange Commission (SEC) for its proprietary ETF intellectual property, ActiveShares.

“It will effectively allow asset managers to protect their intellectual property, while at the same time being able to take advantage of delivering their strategies to the market with greater tax efficiency,” he said. “With these recent developments, we expect active management in the ETF universe to advance.”

Michael Barrer, Associate Director of Capital Markets at WisdomTree Asset Management, shared liquidity considerations, noting that WisdomTree is not focused on the nontransparent active space, but does offer transparent active funds.

“When you move down the spectrum into nontransparent active, liquidity, obviously, will be ample,” he said. “Liquidity of ETFs are truly dependent, at a minimum, based on the underlying liquidity of the basket. But I would expect that when you remove transparency, you bring risk into the portfolio. If you add a little bit of risk to a market makers’ position, you’re going to see spreads widen out to compensate for that risk they’re taking.”

From a distribution perspective, Gregory Trinks, Executive Director, Fund Investment Solutions, Americas, at UBS, said innovation is driving the industry in the right direction, but there’s still plenty of work to do.

“There is a population that is still getting comfortable using an ETF and executing in a world where you’re on an exchange and there are spreads versus the comfort of executing a NAV,” Trinks said. “Even in a fully transparent active ETF, those are challenging situations, and there’s definitely an educational hurdle.”

ESG Considerations

McMillan said ETFs that consider important environmental, social, and governance (ESG) factors are also part of recent product development trends — and Gilligan said they are beginning to pay off.

“Over the course of the last 12 to 16 months, we’ve seen a fair amount of cash flow into our various ESG ESG strategies,” Gilligan said. “There does seem to be some proof statement here in terms of advisor and institutional interest in ESG strategies.”

Barrer noted that end investors view environmental, social, and governance issues differently. “That’s really the challenge when it comes to product development — how do you take all that information and create a one-size-fits-all product or suite of products that can solve for these different ESG needs?”

Trinks said some asset managers essentially have ESG ingrained into their DNA but haven’t publicized it until now. “ESG investing used to carry a stigma around performance, but I think we’ve done a good job as an industry of dispelling that myth,” he said.



Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the NICSA panel, they do not necessarily reflect the views of NICSA or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

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