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Scalability is the Key to ETF Distribution

By Jesse Mark

ETF providers are in a precarious position. On one hand, U.S. ETFs have reached over $1.14 trillion (despite a recent blip in May) and are apt to grow. But on the other hand, competition is fierce. Twenty-five firms plan to add ETFs to their lineup, which would almost double the number of available providers. If firms want to increase market share of the growing ETF pie, they will also have to confront a number of unique challenges such as:

• Thin operating margins
• Advisors hold ETFs for a shorter period than mutual funds
• The product is effectively a commodity
• Advisors' preferred list is shorter than for mutual funds

Just how thin are operating margins on ETFs? According to kasina's analysis, for ETFs in the equity space, the asset weighted expense ratio is a meager 35 bps. We estimate an operating cost ratio of 16 bps, leaving firms with a paltry 19 bps net margin. And this is assuming some economies of scale!

All of this contributes to the need for a sales strategy that capitalizes on highly scalable resources - because it is difficult to justify a large wholesaling team. Firms need to pick their spots selectively, segment advisors, and ultimately adopt distribution strategies to match their firm sizes and product lineups.

In kasina's latest report, Mastering ETF Distribution, we provide recommendations for both large and small providers to mitigate the impact of thin ETF margins and a concentrated market. Since the stakes in the ETF market are higher than ever, firms need to ensure they have an encompassing strategy that will:

• Broaden ETF adoption
• Scale firm resources
• Enhance service and support
• Increase advisor loyalty
• Drive profitability

Firms that fail to take action risk being left behind as advisors become loyal to fewer firms.