The group that began as a handful of managers taking interest in the
funds during the early 1990s has now grown into an established
market, attracting the attention of ETF providers who view the
strategists as a key to promoting their ETFs.
"It's a segment that's exploding," said Steve Cucchiaro, chief
investment officer of Boston-based Windhaven Investment Management
Inc, which ranks among the largest ETF strategists. At more than $18
billion, assets at Windhaven, owned by Charles Schwab Corp, are up
roughly 32 percent this year.
The strategists, who research, design and manage ETF portfolios, see
demand for their specialized expertise among investment advisers,
individual investors and, increasingly, institutional clients like
state pension funds and large insurance companies.
Chicago-based research firm Morningstar Inc counts 645 strategies
from 145 firms with total assets of $80 billion as of June — an 18
percent jump since January and up 46 percent in just a year.
ETF strategists like Cucchiaro say they expect an increase in the
use of their portfolios by institutional clients and foreign
investors to drive growth over the next few years as the market
Until recently, ETF strategists were mostly used by financial
advisers for their clients, said Sue Thompson, managing director at
iShares, the largest U.S. ETF provider owned by BlackRock Inc. But
in 2013 "we've really started to see the ... institutional buyers
start to come in." That has resulted in greater use of ETFs in
IShares started tracking ETF strategists in 2008, when it saw about
$5.8 billion in assets managed by some 25 strategists. Now it tracks
more than 200 strategies from more than 100 managers with more than
$64 billion in assets. Thompson said she expects that number to
double again in the next two years, to $120 billion in assets.
"You'd be hard pressed in this industry to find anything that grew
from $5.8 billion to ten times that in five years," Thompson said.
"I anticipate that we've got quite a bit of runway before you begin
to see that growth rate taper off."
RISE OF THE STRATEGISTS
Much like stock pickers, ETF strategists select funds that fit a
specific investment concept — be it a tactical response to market
conditions or a more strategic asset allocation approach. Their
portfolios can focus on the U.S. market or be international in
scope, and quantitative or fundamental in the way they analyze
investments. But rather than choose individual securities, they
create portfolios of ETFs.
Windhaven, for example, offers model portfolios composed of ETFs
across a variety of asset classes that clients use for a set annual
management fee — ranging from 0.7 percent to 0.95 percent, based on
the amount of assets they are investing.
ETFs, which trade in real time on exchanges like stocks, typically
track an index of such securities. They tend to be transparent, so
researchers can know exactly which stock shares or particular bonds
are in a particular ETF.
"Our ability to add value is just as great as the value that can be
added through average stock pickers," said Scott Kubie, chief
investment strategist at Omaha-based CLS Investments, LLC, which
designs ETF portfolios.
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With roughly 5,000 exchange traded products listed globally,
including 1,500 listed in the United States, ETF providers know that
having their funds included by a successful ETF strategist could
open the door to a flood of end-client investors.
"It could mean a lot of money" for funds that are used in
strategies, said Brendan Ahern, a former iShares director who now
works at New York-based KraneShares, a start-up ETF provider whose
funds are focused on investing in China.
The largest ETF providers do tend to appear most in the strategists'
portfolios, but the strategists do offer entree to ETF firms with
Providers like Ahern talk up their products at large industry
conferences, like Morningstar's annual ETF Invest conference in
October, where an entire section, called the "Managed Portfolios
Gallery," was dedicated to booths of ETF strategist firms.
"You want to be that tool of choice, and that's the same as it is
for KraneShares as it is for iShares," he said.
Many ETF providers have also built out sections on their websites
dedicated to ETF strategists and asset allocation models.
KraneShares, for example, has an Asset Allocation Benchmark Series,
which includes a section on ETF managed portfolios that assesses
INSTITUTIONAL, INTERNATIONAL GROWTH
The next leg of asset growth for ETF strategists and portfolio
managers could be coming from institutional clients and non-U.S.
investors who are increasingly using strategists.
BlackRock, which has published a guide to ETF strategists in the
U.S. for five years, recently expanded the program to Europe.
Jeff Montgomery, chief executive officer of Texas-based AFAM
Capital, an asset manager that specializes in managing ETF
portfolios through its Innealta Capital division, said much of that
increased interest from institutional clients has come over the last
"Institutions and endowments, pension plans, 401(k) plans and
retirement plans have begun to take a very, very close look at our
space, and they're beginning to place assets with us," Montgomery
said. His firm ranks fourth among largest ETF managers according to
Still, the vast majority of the firm's current business — roughly 85
percent — is with financial advisers, as has historically been the
case with most ETF strategists.
"The financial planner looks like the general practitioner doctor
that can do a lot of things, and they go find a specialist when they
need brain surgery," said Montgomery. "Well, we're the brain surgery
[REUTERS MEDIA; By Ashley Lau]
(Reporting by Ashley Lau; editing by Linda Stern and Andrew Hay)
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