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ETF veteran issues fund firms three year warning

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ETF veteran issues fund firms three year warning

One of the leading figures in the exchange traded fund (ETF) industry has issued a stark warning to active managers. 

In a white paper, ETF Securities co-founder Hector McNeil (pictured) has told fund firms they have just three years to enter the ETF market, or run the risk of failing to get products off the ground.  

One of the big trends recently has seen fund houses setting up ETF businesses alongside their traditional active arms.

Fidelity, JP Morgan, Legal & General Investment Management, BMO are among those who have recently made pronounced shifts into the ETF market over the last year or so. 

For those who are yet to be convinced, McNeil, who set up his new ETF business HANetf at the start of this year, warned that time is running out fast. 

HANetf believes ETFs will dominate the fund landscape in 15 years' time. 

'It is our view that in 15 years all new funds will be ETFs that can be traded throughout the day and any remaining mutual funds will
need to look and feel more like ETFs in order to survive and retain legacy assets,' the firm stated in the white paper.

After taking a while to justify their place, ETFs have really come of age since the credit crunch, with the market controlling some $4.5 trillion (£3.5 trillion) in assets.

HANetf also pointed out ETFs have registered 51 months of consecutive net inflows.

'An ETF is just a piece of technology which has streamlined the investment process, and essentially digitised investing,' McNeil said.

'However, this piece of technology is increasingly important when it comes to distribution, and unless asset managers start to implement such solutions within the next 36 months, it may be too late for them.' 

McNeil warned that unless asset managers take ETFs seriously now, they may fail to gain enough assets to make them viable as products for their businesses.  

'It can take two to three years to get traction in an ETF, and so if asset managers have not launched these solutions by 2021, they could struggle to get them off the ground,' McNeil explained.

'Asset management groups have told us that they are holding back from creating an ETF strategy because they fear cannibalising existing funds, have concerns around the cost of launching, and worry that, with so many ETFs already available, they would struggle to garner interest, but many of these fears are overblown and can be overcome by engaging with the ETF industry more closely.' 

McNeil pointed out that as long as fund firms focused on creating ETFs for specific strategies, existing monopolies should not be a deterrent. 

'There is no monopoly in active ETFs built around specific products at the moment, so that is an opportunity for asset managers, and the cannibalisation and cost points are also often overstated,' he said. 

He added there was little sense in launching products where price and scale were the only factor, such as FTSE 100 trackers. 

The white paper highlighted active ETFs as a significant opportunity for asset managers.

It noted active ETFs represent a small portion of the existing ETF market in both the US and Europe, accounting for around $49 billion of assets, according to IHS Markit. 

However, while assets are relatively small, the active ETF market grew by 57% between January 2017 and June 2018 with 91 new active ETFs coming to market.  

'Active ETFs in particular are one of the most significant growth opportunities but are a segment of the market that is controversial, poorly understood and, in Europe, subject to inconsistent regulatory
treatment,' the paper said. 

'ETFs have won the war for basic index exposure. Tomorrow’s battle grounds are thematic, smart beta and ultimately active strategies. It’s clear that the supply of transparent ETFs is growing.

'[However] it is also clear the industry needs a solution for non-transparent ETFs to allow the active equity ETF world to flourish.'  

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