Innovation has long been one of the driving forces behind the expansion of the exchange-traded universe. Most recently, innovation has struck the industry in the form of a comprehensive platform designed to help investment managers bring their strategies to market: enter ETF Issuer Solutions. We recently talked with the president of ETF Issuer Solutions, William Smalley, who shared his firm’s story, their objective, and insights surrounding the industry as a whole [see also Recent ETFdb Interviews].
ETF Database (ETFdb): What was the inspiration behind creating ETF Issuer Solutions?
William Smalley (WS): The genesis of the ETFis platform came from our perspective as product managers at emerging ETF sponsors. We found that the barriers to entry, both in terms of product origination and distribution penetration, were daunting and expensive. We formed ETFis in 2012 to address the challenges that all new entrants to the space will face.
The ETF industry “grew up” quickly and, frankly, a little haphazardly. The infrastructure for such a rapidly expanding space struggled to keep pace with product innovation and tremendous AUM growth. Much of the technology, operations, and distribution support were serviced by legacy mutual fund infrastructure and processes. We felt there was significant demand for a comprehensive, ETF-specific services model that allows emerging product issuers to focus on what really matters: strong performance and effective distribution [see also 7 Charts to Put the ETF Industry in Perspective].
ETFdb: Who is ETFis targeted towards? Why does it make sense for them to utilize this platform?
WS: The ETFis platform does not necessarily target a particular type of ETF issuer – we have the regulatory framework and operational infrastructure to support both index-based and actively managed ETFs. That said, we see the biggest demand for the platform from middle market hedge funds, CTAs, and investment advisors who are seeking to efficiently launch a retail version of their flagship strategies in an effort to cast a wider net without having to make a significant investment in internal headcount and regulatory permissions.
Coincidentally, we believe the biggest opportunity for new AUM growth is in alternative strategies. The “liquid alts” movement has not yet made its way to ETFs – we are positioning the ETFis platform as the destination for sophisticated ETFs managed by specialists in particular asset classes or strategies [see Alternatives ETF List].
ETFdb: There are some critics who think that ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?
WS: We had a period between 2007 and 2009 where ETF product innovation was focused more on trading vehicles rather than longer term portfolio tools. The recent wave of smart beta and actively-managed ETFs are tailored to more closely meet the needs of the buy and hold investor rather than the day trader. Such products can be more complex than broad-based beta ETFs, and typically have somewhat higher management fees, but they have been successful in raising AUM because they fulfill needs within portfolios that may be unmet by broad-based ETFs. We continue to be bullish on these products in large part because they have real appeal to buy and hold investors of all shapes and sizes.
ETFdb: What are some of the trends you are seeing as far as what kinds of products are quick to gain momentum? Can exotic ETFs compete with “proven strategies” in the same space for assets?
WS: Gauging “quick momentum” for new products is very difficult. The notion that listing an ETF with a great strategy or index behind it will lead to instant adoption is a fallacy in 2014. Active/alternative ETFs may not directly “compete” with more established and less complex ETFs; rather, we often look to garner market share outside of existing ETF assets – be it hedge funds, mutual funds, closed end funds, etc. with comparable investment objectives. These ETFs fall somewhere in between SPY and higher fee pooled vehicles [see The Cheapest ETF for Every Investment Objective].
ETFdb: What do you expect in terms of ETF adoption going forward? What types of investors have been slow to adopt or are potentially major beneficiaries of embracing ETFs?
WS: We expect increased usage across nearly every channel. We are paying particular attention to the shifting dynamic in the investment advisory space – from the transactional brokerage business to the fee-based wealth advisory model. The rise of the “ETF Strategist” is no coincidence, in our view. Perhaps the biggest barriers to fall are in the defined contribution and insurance channels, though we expect that to come slowly over the next decade. Those are especially intriguing possibilities to us because we believe technology solutions will help catalyze adoption and make distribution ubiquitous and highly scalable.
The Bottom Line
The ETF industry has undeniably democratized the investment process. However, from an issuer’s perspective, this landscape remains riddled with nuances; more specifically, the hurdles associated with starting as well as running an exchange-traded fund can be quite intimidating. As such, ETF Issuer Solutions continues to push the innovation envelope forward as it strives to bring forth compelling strategies and products that might otherwise not get the attention they deserve.
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Disclosure: No positions at time of writing.