2018 ETF Industry Outlook

From Kip Meadows, CEO of Nottingham: As the industry continues to balloon in size, many are beginning to wonder what the future may hold for the ETF landscape.

Despite having been around for decades, ETFs only recently exploded onto the scene. ETFs destroyed records in 2016 in both asset inflows as well as the total number of product launches. So far in 2017, the ETF industry is on track to break these historic highs yet again with approximately $385 billion in inflows so far this year (as of Nov. 1).

Investors love ETFs for their low costs, liquidity, tax efficiency and the broad exposure to various corners of the market they often provide. But no one saw the magnitude of the industry’s explosion coming. What was once seen as a fringe investment vehicle has now attracted Vanguard, BlackRock, and many more of the largest players in money management, not to mention the attention of the mainstream financial media.

But despite the quick rise to superstardom, everyone still wants to know how high ETFs can fly. In that light, here are three of my predictions for the industry in the upcoming year:

Slowdown of index-based methodologies

2017 will be remembered as the year hundreds of new indices hit the market, as well as the corresponding ETFs that track them. The passive versus active competition swung heavily in the favor of passive investment strategies as billions of dollars flowed into ETFs tracking index-based funds. The race to the bottom in fees only perpetuated this shift as many of these passive strategies boasted much lower expense ratios than their actively managed counterparts.

However, the pace of new indices coming to market is simply not sustainable, and I suspect more new active ETFs to enter the market to help fill the void this massive shift left behind. Passive methodologies certainly have their place, but the opportunity for new, actively managed products looms large. While smart beta ETFs cannot compete with passive products based on price, many of these strategies can pay for themselves with their ability to outperform the broader market, and I suspect savvy active asset managers will make their move by launching new products in the coming year.

Infiltration of retirement plans

Despite being overwhelmingly popular with individual investors, ETFs only represent a small portion of the assets held in employer-sponsored 401(k) plans. In fact, according to the Investment Company Institute, mutual funds still account for more than two-thirds of the $5 trillion held in 401(k)s despite their higher expense ratios.  

This presents a huge opportunity for retirement fund sponsors seeking ways to boost the performance of their plans. Considering ETFs offer much of the same broad exposure mutual funds provide, they are able to outperform thanks to their lower fees. I expect retirement fund sponsors and advisors to take a closer look at adding ETFs to their company-sponsored accounts in the New Year.

Greater adoption of white label ETF services

As the market for ETFs becomes increasingly crowded, it has become very difficult for a new entrant or smaller player to get new products off the ground in this highly competitive environment. White label ETF issuers can offer a life line to these asset managers looking to successfully and efficiently bring a new product to market.

First, white label ETF platforms can cut the wait time for the SEC to declare an ETF effective in half, because the exemptive order process has already been undertaken. Going at the exemptive order process alone can take several years, while white labels or series trusts have already been through that process, which new ETFs then leverage. Maintaining the exemptive relief process for a de novo filing certainly adds to the operational and legal costs. A series trust with existing exemptive relief spreads those costs. Adding a new series to an existing white label ETF platform typically costs less than $100,000, whereas a de novo filing will almost certainly be well over $100,000. Time is money, and with firms possibly waiting more than two years just for exemptive relief, it typically makes more sense to engage a white label platform.

Finally, white labels offer new entrants something money can’t buy – existing relationships and experience in this competitive market. These two priceless intangibles will not only come in handy during the launch, but throughout the lifetime of the fund.

An eye toward the sky

When any industry experiences as much explosive growth as ETFs, predicting the future can be a difficult task. While we do not have a crystal ball, it’s fair to say the above trends have a strong potential of playing out. Whether or not the industry goes down these avenues in 2018, one thing is for sure ?”? ETFs will continue to play a large role in meeting the needs of investors of all shapes and sizes.

About Nottingham:

Nottingham has been serving clients in the fund industry for decades by providing fund organization, fund accounting and fund administration, among other services. The firm currently offers its series trust to innovative asset managers that seek to launch exchange-traded funds (ETFs).


This article is brought to you courtesy of Nottingham.