ETFs are in the hot seat, now what?
“The spotlight on the asset management industry has been bright.”
These were the words articulated by SEC Chair Mary Jo White in her speech at the Investment Company Institute’s 2016 General Membership Meeting last week in Washington D.C.
As hundreds of industry leaders nodded their heads in agreement, the Chair proceeded by detailing the need for even more “dynamic and robust” regulation of the fund industry, especially as it relates to the oversight of ETFs.
As the SEC investigates events such as the flash crashes of May 2010 and August 2015, its magnifying glass has been placed on volatility swings, liquidity concerns and pricing disparities, among other factors.
Also of note in White’s speech was a heightened focus on the role of market makers in trading and operations, the interconnectedness of ETF share prices and portfolio holdings, as well as the sales practices of broker-dealers.
It doesn’t look like the spotlight is dimming anytime soon for the ETF industry.
Expectedly so, news of tightened regulations is not necessarily welcomed by the ETF crowd. This is especially true in light of the recent spur of acquisitions. The proverbial big fish in the fund industry – Oppenheimer, JP Morgan Asset Management, Hartford Funds, and the like – are swallowing up smaller ETF shops in an effort to stake their claim in the land of smart beta, leaving the ETF “middle class” in the dust.
As the big get bigger, what’s the fate for the rest of the ETF issuers who are true boutiques in the industry? What happens to the innovators and disruptors who haven’t gotten investment from or aligned with the larger investment industry players? The cost of compliance and operations already eats up much of the revenue produced by the first $50 million in AUM. The threat of added regulation will only push that break-even mark higher, thus making the barrier of sustainability that much higher.
Only time will tell, but what we do know is that strategy alone is no longer enough to fuel organic growth for ETFs. However, if an ETF shop wants to thrive in today’s David and Goliath environment, the answer is quite simple… Market.
With 1,594 registered as of 2015 and $2 trillion in net assets, it’s no secret that ETFs are proliferating. Growing an ETF to a sustainable “critical mass” level of assets and generating enough market interest to have meaningful trading volume requires more than just a good investment strategy and a market maker. Success going forward will be predicated as much on the coordinated efforts between distribution, marketing and publicity that cultivate interest from investors in the ETF. Like we’ve said before, now, more than ever, ETFs need to be thoughtfully marketed and publicized to have staying power.
Already, the process for engaging social media has been tilted in favor of large firms with big budgets as FINRA charges for review of individual tweets and status updates sits around $125. Posting daily, or multiple times per day, is no big deal for the BlackRocks and Vanguards of the industry. For upstarts, the cost to use social media can deter them from leveraging all the channels their bigger competition has at its disposal. You need to be savvy about how you engage marketing, PR, social media and sales to get results on a limited budget.
Since 2008, our agency – one of the top 10 financial PR firms in the country, per O’Dwyer’s – has been helping ETF issuers craft their brands, develop crisp messaging, build a market presence and magnify the reach of their messages and product stories.
While there is still plenty of opportunity to be had, there’s no denying compliance changes and industry restructuring will present challenges for ETF providers. But it is in choppy waters, especially, when you’re going to want to tap your brand equity to pull you through.