Nearly 40% of the ETF industry’s assets are in BlackRock’s iShares. Including dollars in Vanguard Group and State Street Global Advisors offerings, the world’s three largest asset managers combine for about 80% of ETF assets asset under management.
“It’s almost like people fighting over the crumbs falling out of Godzilla’s mouth,” Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said during a panel at the Inside ETFs conference in Hollywood, Florida on Jan. 27.
Being innovative and finding niche corners of the market where other asset managers aren’t has been the calling card for many entrepreneurial firms, executives from a slate of startups noted. But while scaled firms have historically launched lower-cost products that resemble the strategies first launched by the industry’s smaller players but have cheaper prices, they said distribution is perhaps a more critical hurdle.
“I think the more frustrating part for me is the distribution aspect that if you’re not on the platform, someone can not only copy you but they can be on a distribution platform and get those assets,” explained William Rhind, founder and CEO of GraniteShares.
The New York-based commodities specialist has five ETFs on the market with a combined $742m assets, according to ETF.com. Its largest offering is the $627m GraniteShares Gold Trust (BAR), which launched in August 2017 at 17 basis points.
Rhind said wirehouses have only intensified gatekeeping measures in recent years to determine what products it will allow on a platform. Among them is a firm’s total assets under management, not necessarily the dollars in the ETF itself.
Andrew Chanin, CEO of ProcureAM, also explained at the panel that approval may not be based on data and numbers, but on which firms the distributors prefer.
“There are some favoritisms that they might be approving not the best product, but because they have a better relationship, that’s what happens,” he said. “Unfortunately, the clients are the ones that suffer.”
Issuers like Global X Funds, ROBO Global and First Trust Advisors have competed with iShares, which has recently ramped up its focus on thematic offerings, with products primarily investing in emerging technology. There are 355 iShares ETFs with about $2trn in assets.
In the robotics space, for example, the $1.6bn Global X Robotics & Artificial Intelligence ETF (BOTZ) and the $1.3bn ROBO Global Robotics and Automation Index ETF (ROBO) have benefited from being among the first to market in the space. The $68m iShares Robotics and Artificial Intelligence ETF (IRBO), since launching in 2018, has not garnered as many assets despite being cheaper.
Procure launched the Procure Space ETF (UFO) — a fund that tracks a tier-weighted index of global aerospace companies — in April. At 75bps, it has collected about $17m since hitting the market. Chanin is also widely known in the industry for having worked with a white-label provider ETF Managers Group to launch the $1.6bn Prime Cyber Security ETF (HACK), which launched in 2014 as the first product of its kind.
“A lot of these great ideas are coming from some of the smaller issuers. Sometimes it’s their first product and sometimes it’s their 10th product,” Chanin said. “But if those companies get blocked out because only the big firms can be up on the platforms … it will stifle a lot of innovation.”
Ark Investment Management, a New York asset manager with $3.3bn across its seven ETFs, has used outside partners to help drive distribution. In 2017, NAMA Investment Partners, a subsidiary of largely Asia-based Nikko Asset Management, bought a 16% stake in the company, which was founded in 2014 by former AllianceBenstein executive Cathie Wood.
The outside investment followed Resolute Investment Managers, the parent company of American Beacon Advisors, taking a 23% stake of Ark in 2016.
NikkoAM opened up distribution channels for Ark in Australia and Japan, Wood previously told Fund Intelligence, noting the firm was also interested in selling strategies in China.
Ark’s largest ETF, the nearly $2.1bn ARK Innovation ETF (ARKK), reeled in $358m in 2019, according to ETF.com.
Making sure smaller fund groups are not barred from platforms is crucial to increasing investor options and the well-being of the industry more generally, Rhind argued.
“If everybody’s portfolio is made up of BlackRock, Vanguard and State Street funds, well then everybody’s portfolio looks the same,” he added. “So therefore, the only way you can differentiate as an adviser is on fees, which is exactly probably what you don’t want to do.”
“We can’t take out an ad in the Super Bowl this weekend,” Rhind said.
New York Life bought a commercial slot during the National Football League’s championship game, to be played on Feb. 2. The $257bn insurance company has a nearly $3.5bn ETF arm with 26 offerings, according to ETF.com.
SSGA, with $743bn in ETF assets across 140 products, brought an enormous marketing campaign to Charles Schwab’s IMPACT conference in San Diego in November, which had about 2,000 RIAs in attendance. Dan Sondhelm, CEO of marketing consultancy Sondhelm Partners, previously told Fund Intelligence that this move was comparable to a Super Bowl ad in terms of investment, but targeted more directly at the adviser community.
The challenges of competing with often lower-cost products on more distribution platforms spurs boutique firms to be more creative on the marketing side.
“Part of being a modern asset management company is to have a part of the business that is more media company than traditional asset manager,” Rhind explained. “We’re living in an age where it’s important to connect with as many people as possible, so you have to be able to now use the channels available to you to do that.”
Dodd Kittsley, national director of David Advisors, also noted that finding the right client is a key to selling products. His firm, which uses passive and active strategies, said building relationships over time with both advisers who formerly just used mutual funds, as well as existing ETF users, is important.
“The big firms can do a lot,” he said, “but no firm can be all things to all people.”