Traditional US ETF strategists have said the increasing competition from ETF providers is the most significant challenge they face in the current environment, according to research conducted by consulting firm Cerulli Associates.
The survey found 77% of strategists rate competition from ETF issuers as the most as the most significant challenge in 2018, up from 33% in 2016.
ETF strategists are responsible for building investment portfolios for clients and financial advisers mainly using ETFs.
Their business model is being threatened by ETF issuers increasingly launching ETF managed portfolios to offer clients an alternative way of investing across their products.
Daniil Shapiro, associate director at Cerulli, warned strategists need to develop niche strategists and deliver an attractive value proposition in order to stay competitive.
He added: “The fees that strategists charge for their asset allocations can appear excessive when compared with the zero-cost allocations frequently available from issuers that generate revenue from the expense ratios of their underlying ETFs.”
In response, the research found one-third of strategists are considering partnering with an ETF sponsor, while others are actively developing or considering developing ETFs.
With increasing pressure on their business models, strategists are looking at two avenues; either launch their own ETF range or lend their brand to an ETF issuer.
Shapiro commented: “Both approaches present challenges for small and mid-sized strategist firms.
“Launching an ETF is a costly effort and success requires existing clients and distribution capabilities, while partnering with an existing issuer may lead to a more expensive product.”
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Cerulli said these partnerships are likely to become increasingly important, especially as the two models clash with issuers launching managed portfolios.
Not only has this led to increasing competition between issuers and strategists, the report concluded, but also cooperation.
