Fund providers are in the business of trust, and the monetization of trust is changing. The story of the future state of the ETF industry will not be based on a price narrative or with an explicit focus on exotic solutions being offered in an ETF vehicle. There will be far less dispersion in management fees between active, strategic beta and index ETFs. There will also always be room for exotic or niche ETFs. However, what will matter most are high quality, well-managed ETF solutions, superior investor experience and vehicle choice of mutual funds and ETFs for investors.
The ETF industry will see consolidation as many ETF providers find it more difficult to achieve scale and profitability. In due course, the ETF industry will be left with some large firms providing a diversified product suite and select boutique ETF providers who provide expertise in niche segments of the market. Successful ETF providers will serve as true partners to their clients, offering investment market insights, industry perspectives, portfolio construction expertise, tax considerations and a broad shelf of high-quality ETF solutions. There will be a greater emphasis on education and a trend towards more disciplined ETF product development. Winning firms in the ETF industry will be those that offer well-structured solutions with careful attention to detail. For example, total cost of ownership based on factors such as management fees, trading frequency, liquidity and tax management. The smallest nuances can have an impact on long term returns beyond headline management fees. Within active strategies, the trade off between alpha generation and execution costs will be another important consideration for all investor types.
Higher Expectations for ETF Providers
In the long run, investors will have higher expectations of asset managers. ETF providers will seek to deliver institutional quality investment management and client support. Investors are becoming more selective and expect enhanced transparency and a better understanding of the solutions in which they invest. Investors will expect to work with a partner, not just a product provider.
Intermediaries (such as advisors) will have increased focus on their fiduciary responsibility to investors. Advisors will turn to ETF providers for greater transparency in justifying the value of their partnership. Asset managers will also increase usage of ETFs as tools in active strategies. As fiduciaries, they will expect institutional quality and proven track records from ETF providers. But many managers will increasingly turn to ETFs in large part because of the externalizations of costs.
The evolution of robo-advisors and more accessible target date fund solutions are just a few examples of institutional pension-style investing that will continue to be adopted broadly by investors. Asset allocation decisions are frequently made top-down with asset and sector allocation decisions being most critical. ETFs are and will be useful tools in this regard.