Fund industry heavyweights dominate the ETF market

Neuberger Berman and a handful of some of the world’s biggest investors are joining the exchange-traded fund industry for the first time as they seek a foothold in a fast-growing sector that has piled pressure on active managers to that justify their rates.

The US investment house is part of a group including Morgan Stanley, SEI and Matthews Asia, which together manage $3 trillion, that recently launched or signaled their intention to launch their first ETFs.

Those companies follow other recent heavyweight converts, such as T Rowe Price, Dimensional Fund Advisors and Federated Hermes, in rushing to launch ETFs as the products quickly gain market share at the expense of traditional mutual funds.

The launch of such ETFs comes against a backdrop of falling fund fees, in a further sign of the heat facing active managers as investors capitalize on the proliferation of cheaper passive products. As a collection of securities that track an index, an ETF is cheaper for a manager than a practical old-school vehicle. Such savings are typically passed on to the ultimate investor, along with superior tax efficiency, at least in the US, increasing the attractiveness of the funds.

In the US, ETF assets rose 185% to $7.2 trillion in the five years to 2021, according to the Investment Company Institute, while mutual fund assets grew 65% to $27 trillion. dollars during the same period. Globally, ETF assets have more than tripled to $10.1 trillion since 2015, according to consultancy ETFGI.

“If you’re talking about meeting clients where they are, the ETF tool is one we want to offer alongside our other offerings,” said Noel Archard, global head of ETF and portfolio solutions at AB.

Morgan Stanley, which has $1.4 trillion in assets under management and was ranked 15th by Willis Towers Watson in its latest report, is the largest fund provider that doesn’t offer ETFs.

However, an internal memo written by Dan Simkowitz, the bank’s head of investment management, said it had made a “strategic decision” to launch a multi-asset ETF platform that offers active and systematic strategies this year.

Morgan Stanley shared the memo, which was distributed in March, but declined to comment for this story.

For AB, the imminent arrival of its first US ETFs will be the culmination of a 12-year journey.

It filed to launch stock ETFs in 2010 and later received approval from the Securities and Exchange Commission, but the funds never saw the light of day. While AB was shaking, Cathie Wood made the decision to leave in 2014 and created Ark Invest, which has since launched a series of ETFs.

However, AB appears to have rekindled its earlier enthusiasm for the idea of ​​launching ETFs and filed earlier this month to launch actively managed tax-conscious short-term and ultra-short income ETFs.

Archard, who was hired from State Street Global Advisors in February to spearhead the push, said a “significant event” in AB’s final ETF conversion was a 2019 SEC ruling that simplified and expedited the ETF approval process. , including actively managed.

“It lowered one of the barriers to entry for a lot of companies that had been thinking about getting into ETFs,” Archard said. “We have a predominantly active footprint. That rule change prompted another look at whether we should introduce [active ETFs].”

Archard said AB’s two initial fixed-income ETFs should list “late in the third quarter or early in the fourth quarter” and that he was planning “a number of equity products.”

While the rollout is starting in the US, Archard said AB is “not limited” to any one region. Your initial ETFs will have a fully transparent structure, which is essential in markets like Europe, where the semi- and non-transparent portfolio protection structures common in the US have yet to be approved.

Kevin Barr, head of SEI’s investment management unit, said the company was “looking for something that is differentiated.” “There really isn’t much need for more passive ETFs,” he added.

The first fruits of these efforts are four actively managed, factor-based, large-cap U.S. equity funds that launched on May 18. SEI has been running these strategies since 2013 on separately managed accounts, which are only available to institutions and wealthy individuals. The price is comparable to 15 basis points.

Although SEI is initially focusing on the US market, Barr said it was “actively looking” at launching active ETFs in Europe, without the need for full transparency being a barrier. “We are comfortable with transparency. It is not a passive approach where someone can arbitrate you,” she added.

Neuberger Berman debuted its first three ETFs in April of this year. Actively managed thematic equity strategies cover the Connected Consumer, Carbon Transition and Infrastructure and Disrupters ETFs, each at 55bps.

The New York-based group already manages $18bn, out of a total of $460bn, in thematic funds and Hari Ramanan, its CIO of global research strategies, cited the “potential for tax efficiency” in expanding this range. to ETFs.

Matthews Asia is also going the transparent active equity route, introducing three ETFs in April focused on emerging markets, Asian innovators and China, building on its existing mutual funds in these areas.

“While we believe that mutual funds will continue to provide benefits to many investors, we have seen growing interest from financial intermediaries and end-investors who want to take advantage of the benefits that active ETFs offer,” said Jonathan Schuman, global director of Matthews Asia. distribution.

Matthews Asia may have spotted a potential gap in the market, given the relative lack of actively managed Asia or China ETFs at present.

But all ETF newcomers may have to find their own niches to gain a foothold in an industry dominated by BlackRock, Vanguard and State Street, which together still account for more than three-quarters of the US market.

When asked how SEI offerings could challenge the three market leaders, Barr responded: “[We] I don’t see people offering these products. These are differentiated products. This is not a ‘me too’ strategy.”

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