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The number of new entrants to the global exchange-traded fund market is on track to equal last year’s record as active managers seek to join an industry boom that shows no signs of abating.
In the first five months of the year, 22 companies launched their first ETFs, according to data from TrackInsight. This is in addition to the 51 new suppliers registered last year, well ahead of the previous record of 34 reached in 2015 and 2017.
The increase in the number of new issuers reflects a dramatic increase in the popularity of ETFs, which posted record net inflows of $ 359 billion in the first quarter of this year and over $ 1 billion in the 12 months to at the end of March, according to the consultancy firm ETFGI with total assets reaching 9 billion dollars at the end of April.
New entrants are entering a market in which more and more niches are filled, providing fewer opportunities for new entrants to make their mark and build critical mass, but most observers expect the rush keep on going.
“The barriers to entry are really low. You need a little cash to invest, but it’s easy to start an ETF, ”said Peter Sleep, senior portfolio manager at 7 Investment Management.
“There is an ecosystem – lawyers, custodians, index providers, consultants. You can almost get [an ETF] on the bookshelf.”
The emergence of white-label issuers that provide a one-stop-shop for small asset managers launching ETFs, such as HANetf in the UK and Alpha Architect and Nottingham in the US, makes the process even more transparent, said Sleep.
“They’re good at marketing and they’ve got it all. All you need is an idea and some start-up money.
Many of the new entrants have been active (rather than passive index) managers, fueled by US law allowing ETF providers to conceal their list of holdings from the broader market in order to protect their “secret sauce”.
The three new entrants to raise the most money since 2019, Kansas City-based Avantis Investors with $ 4.9 billion, and National Bank Investments and CIBC of Canada, all manage active funds.
“Most of the new entrants are focusing on active ETFs. They want to diversify with new types of products but offer the same strategies as in other formats, ”such as mutual funds, said Anaëlle Ubaldino, head of ETF research and advice at TrackInsight.
Andrew Jamieson, global head of ETF products at Citi, said the rollout of actively managed ETFs has been a game-changer and is likely to prompt many other asset managers to join the fray in order to avoid be left behind.
“Two or three years ago a lot of people would have said that the ETF market was beyond the reach of anyone not already in a game dominated by a handful of big passive powers, but that has changed,” said Jamieson.
“There is a continuing realization that ETFs are more of a technology than just a wrapper, and arguably better technology than a mutual fund, in terms of trading liquidity and greater transparency.
“We will continue to see new entrants entering the market, especially as the AUM ETF continues to accelerate. I don’t think asset managers can watch this happen year after year and just sit idly by. “
Sleep also saw benefits for asset managers in an ETF structure, rather than a mutual fund. Transaction fees usually occur outside of an ETF, which makes it cheaper, while there is also no need to keep a register of shareholders as is done by a clearing house.
“And in the United States, the biggest market of all, you have this huge tax advantage,” added Sleep, referring to the liability of mutual funds for capital gains when they sell profitable holdings.
T Rowe Price, BNY Mellon, Dimensional Fund Advisors and Allianz Investment Management are among the biggest names to have their feet in ETF water in the past 18 months, but they were joined by 23 pure ETF providers. , the TrackInsight data exposure.
Eight of them offer thematic ETFs ranging from cybersecurity and medical cannabis to “social justice” and democracy.
Ubaldino predicted that this trend would continue, given the large asset flows and humanity’s love for a “story.”
Sleep described many of these thematic funds as “dynamic” ETFs that largely buy stocks that are already rising, which “takes a lot of risk when launching an ETF”.
Ubaldino also noted an increase in risk control strategies from Cabana Asset Management, Armor Index ETF and Allianz, which aim to limit stock market declines.
“The markets are supported by monetary policy and we don’t know how long that can last. It is believed that if you enter the market at this stage, you need a safety net, ”Ubaldino said.
Jamieson said he was involved in discussions with several other asset managers considering entering the ETF world.
“There will certainly be new players on the market. Trends over the past 12 months – thematic investing, ESG [environmental, social and governance-based investment], active – all of these play into the hearts of new players rather than dominant passive powers, ”Jamieson said.
Given his view that there is a “high probability” that Europe will also begin to allow portfolio protection techniques that have encouraged the growth of active ETFs in the United States, the Citi man added:
“It has long been argued that every asset manager should have an ETF strategy and I think this is getting harder and harder to avoid. Very few great players don’t have one, or at least don’t assess what it would look like.