U.S. ETF Product Development Trends Point to More ETF Subadvisory Mandates

U.S. ETF Product Development Trends Point to More ETF Subadvisory Mandates

ETFs are an increasingly important focal point for subadvisory opportunity


December 2018, Boston. Recent research from Cerulli Associates, a global research and consulting firm, has found that exchange-traded funds (ETFs) have the potential to become a viable vehicle for managers to deliver active management. This could lead to more mandates for subadvisors as managers look to deliver more esoteric strategies within the wrapper.

“During the past five years, the perfect storm of new ETF issuer entrants, investor preferences, and strong capital market conditions allowed assets within the ETF wrapper to explode,” says Matt Merritt, associate analyst at Cerulli. Total ETF assets currently stand at $3.7 trillion, a growth rate of 141% between 3Q 2013 and 3Q 2018. “Managers are clearly taking notice of this growth,” continues Merritt, “with 89 new firms entering the market over that same time period.”

“Currently, more than three-quarters of total ETF assets are passively managed, market-cap-weighted index products. But, it is important to note that most new issuers prefer to leverage their—or by extension, their subadvisor’s—active management capabilities and deliver active or strategic beta ETFs,” explains Merritt. In the first half of 2018, more than 100 new ETFs entered the market, with 68% of them being either strategic beta or actively managed strategies.

Merritt adds, “This product proliferation is passing through to subadvisors in the form of rapidly accelerating new mandates.” In 2017, Cerulli estimated that more than 20% of new ETFs were launched with at least one unaffiliated subadvisor, a significant uptick from 2012, when only 6% of new products hired subadvisors. Subadvised ETF assets have grown by almost 95% since 2013, and the number of subadvised products available doubled in that same time period, as of year-end 2017.

“As managers continue to shift toward vehicle-agnostic delivery of active strategies, Cerulli believes that subadvisors focusing on best-in-class service and performance will participate in the tailwinds of the ETF market,” continues Merritt, “likely leveraging both existing relationships and potentially developing new ones from a less traditional client type.”

These findings and more are from the December 2018 issue of The Cerulli Edge–U.S. Asset and Wealth Management Edition, which explores the challenges and opportunities facing providers pursuing mandates in ETFs, mutual funds, and variable annuities.

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