Analysis of industry figures hints at investors' growing demand for innovation
For years, low management fees have been a must for any asset manager hoping to launch a new ETF with any prospect of thriving in the marketplace. But a new analysis of products in the U.S. suggests that investors’ preferences are starting to turn.
“The evidence from ‘Annual Client Alignment To Innovation’ (ACAI) tells us that investors today are looking for more alignment with current market conditions,” wrote Dan Weiskopf of Toroso Asset Management in a piece published by ETF.com.
He was referring to a customised measure developed by the ETF Think Tank, a community of U.S. advisors that advocate for the use of ETFs in service of a client-centric approach to investing.
The ACAI ratio, discussed in detail in a paper titled Measuring Innovation in the ETF Industry, looks at the top 20 U.S.-listed ETFs launched every year in the past decade, measured by their current AUM, and “compares the ratio of launches and AUM from client alignment factors, like low cost, to innovation factors like alpha generation.”
The ETF Think Tank defined three hallmarks – access (first to provide), alpha generation, and active management – as the indicators of ETF innovation.
Focusing on the top 20 ETFs launched for each year from 2009 through 2019, Weiskopf said that AUM for such products declined by approximately US$43.9 billion in the period from December 31, 2019 through May 31, 2020. But zeroing in further on those launched in 2016 through 2019 revealed a cumulative AUM increase of US$20.6 billion.
Weiskopf also noted that over the years, there’s been growth in the ACAI ratio and the dominance in more top-20 member ETFs of innovation over low cost.
“This means fewer ETFs are finding success by just competition on low cost, highlighting that there is investor demand for solutions that offer more than just low cost,” he said.
While acknowledging that a majority of industry flows are aggregating into low-cost solutions that focus on cheap beta, Weiskopf said much of those flows are absorbed by ETFs with vintage years pre-dating 2009, which have established brands, distribution, and market share behind them. He further suggested that older products launched between 2009 and 2013 may be getting stale, or are not aligned with current market conditions.
“Many clients will always simply want cheap beta, but where alternative structures and return streams can be embraced, we suggest a focus on access to different return streams, targeted alpha and/or active,” Weiskopf said.
