Over the past decade, the rise of ETFs and the decline of the (actively managed) mutual fund has quickly created giant ETF behemoths like iShares, Vanguard, and State Street, while putting immense pressure on (actively managed) mutual fund companies, with US equity mutual funds in the aggregate experiencing cumulative net outflows since 2008. In turn, this has led a wide range of asset managers to try to adopt their own ETFs, seeking out ways to bring their active management process to a form of actively managed ETF (in a structure that limits their risk of being front-run on large trades).
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at this emerging trend of actively managed ETFs, and why I am very skeptical that active ETFs will ever gain much traction amongst financial advisors.
Ultimately, the key trend to recognize is that the shift of financial advisors from being commission-based to the AUM model over the past decade has shifted the entire financial advisor value proposition. The pressure is now on advisors themselves to show the value they're creating in the portfolio design and management process. Which means they can't just buy active mutual funds - or actively managed ETFs - that the client could have bought themselves in their own online brokerage account.
Instead, financial advisors have been adopting their own internal portfolio design and investment management processes, aided by the growth of the AUM model itself that allows independent advisory firms to be larger than ever before and more capable of having their own investment process. Yet given the limited size of even the largest advisory firms, it's still challenging for most advisors to manage individual stocks and bonds. ETFs became the perfect intermediate portfolio building block.
Which means in the end, the explosive growth of ETFs and their adoption by financial advisors over the past decade may be less about a shift from active to passive, and more about a form of disintermediation where financial advisors are eliminating third-party active managers and bringing the process in-house instead (or if they do outsource investment management, they go to a TAMP or SMA solution that is not available to consumers directly). Yet if this is the case - advisors are looking to bring active value that clients cannot access themselves - it suggests that the push of fund companies to offer actively managed ETFs in the hopes that they can share in the growth of the ETF marketplace may turn out to be nothing but a mirage.