Advisors are in the trenches trying to understand liquidity needs and blend risk tolerance with capacity for risk into a fortified plan of action. Enhancing investor outcomes. That’s the mission. They depend on the home office behind them to help facilitate the mission with the investment offerings being a large part of that. An increasingly important area within, is ETF due diligence. The landscape is changing and ETFs are growing quickly. Many home offices are struggling to adapt which is impacting their advisor’s ability to deliver value. After nearly 400 meetings with retail advisors and numerous conferences calls with home offices of all shapes and sizes, we feel we have a unique perspective on this topic.
A due diligence process should equip and protect. It should provide appropriate access and prevent potential danger. We are finding actual processes to be more limiting than anything. ETFs are not mutual funds, treating them as if they are will not produce desired results. I will restrain from sharing specifics here and opt for generalization of what we’ve found:
Size, Volume, Cost. The three biggies that typically kick start the process. Today, Bloomberg shows 1528 ETFs that focus exposure on U.S. securities. If I were to narrow that to only the funds with at least $100m of assets, averaged 50k shares of volume over the last 30 days, and have an expense ratio lower than the overall group’s median value of .35%, I’m left with 214 funds. That’s 14% of the starting universe. Not to mention, of the leftovers, I would guess the majority are cheap beta. That simple process is throwing 86% of this universe in the trash. There are funds in that 86% that could enhance an overall portfolio, resonate with the end user, and bring value for an advisor. The ETF industry can deliver more than just cheap beta expsoure…
One quick thought on cost – Cost only, without any knowledge of exposure makes no sense to have as a starting point. When comparing apples to apples it does, outside of that, there should be more emphasis on understanding exposures provided. I know what you’re thinking – no home office with thousands of advisors in the field would operate this way…just email me directly for some examples.
Home offices and due diligence committees should be prepared to adjust and adapt their process. The structure of an ETF brings too much efficiency to continue to ignore 86% of the industry. Yes, more work will be required because there are more issues to address and building out a process that equips and protects will take some effort, but It’s worth it. Advisors and clients will appreciate the results.
This post just scratches the surface, but hopefully it can highlight a topic that’s deserving of more discussion.