U.S. Active Managers Evaluate Launching Nontransparent ETF Products

The Cerulli Edge-U.S. Monthly Product Trends Edition reviews how the mutual fund and exchange-traded fund (ETF) markets have changed since the inaugural issue of U.S. Monthly Product Trends in November 2010. In this April 2019 issue, Cerulli analyzes mutual fund and ETF product trends as of March 2019 and provides special coverage on the future of investment management.

Highlights from this research:

Several firms are vying to offer nontransparent ETF structures with key differences in the mechanics used to obfuscate holdings. Active managers are highly interested in offering their strategies via nontransparent structures as they present a unique distribution opportunity with little downside. Of asset managers surveyed by Cerulli, 46% indicate that they would build out nontransparent ETF capabilities should a proposal be approved by the SEC. A further 55% of those respondents indicate that they would launch an equity strategy within a year.

Mutual fund assets stand poised to crack the $15 trillion barrier, finishing March just $12 billion below the mark. In October 2010, total ETF assets remained under the $1 trillion threshold, sitting at $924 billion. Fast forward less than nine years, total ETF assets closed March at $3.8 trillion. Mutual fund net flows outpaced ETFs during 1Q 2019, attracting $80.7 billion compared to $52.7 billion.

Cerulli data highlights that most advisors (65%) intend to use lower-cost share classes in the future. Platform/wrap shares, institutional shares, and other clean shares (excluding R6-shares) are the clear beneficiaries of the use of lower-cost share classes. Combined, these three share class types accounted for 57.8% of asset managers (within Cerullis survey sample) 2017 gross sales. From the advisor perspective, platform/wrap shares and institutional shares accounted for 17.4% and 19.2% of 2017 practice sales, respectively, and project to see increases over the next 12 to 24 months by at least 27% of advisors.