Amidst closures, ETF providers focus on what really matters: Access

U.K. initiative gives pension schemes a way to buy ETFs.

October 22, 2013

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shopping cart_edited-1We made the decision to buy exchange-traded funds (ETFs)—the problem was, how? That was exactly what one plan sponsor told me after his board okayed a plan to shift some of the pension fund’s assets into a U.S. equities ETF. After asking around and finding no easy way to make the buy, one of his managers ended up doing him a favour and helping him make the purchase.

Whether you’re a retail investor or a plan sponsor, access is a big challenge for anyone who wants to use ETFs. On the retail side, investors are largely expected to go it alone, doing their own research and opening a discount brokerage account. Advisors have been much slower to push their clients to the products. And even among sophisticated investors. plan sponsors without the capacity to manage money in-house can find it hard to buy and sell them (just ask the plan sponsor I talked to).

Despite the barriers to entry for customers, the ETF industry has continued to pump out new products, creating ETFs for just about every asset class and investment strategy on the planet. However, new data show the tide is turning—as ETFGI’s Deborah Fuhr reports, the number of new ETFs is on the decline and an increasing number are facing closure because they haven’t attracted enough assets to keep the lights on (the breakeven point for an ETF to cover costs in US$100 million in assets under management). According to Fuhr, only 67 of 1,961 ETFs in Europe have over $1 billion in assets while 1,483 ETFs have under $100 million and 897 have less than $10 million. On top of that, product closures are happening faster than ever.

Amidst all the closing ETFs, is a highly positive trend is emerging—ETF providers are at last reaching out to customers and creating more access points for those investors who want to buy their products. Last weekend, the city of London saw a host of free educational events for investors who want to learn more about how they work and how to use them. And here in Canada, there is ample evidence the mutual fund-focused adviser community is warming up to ETFs and finding ways to bring them to their clients.

Perhaps the most interesting development, however, is happening in the pension space in the U.K.—ETF provider BlackRock has signed up four custodians to help make the products more readily available to pension funds according to Financial News (subscription required). Most pension schemes in the U.K. haven’t been able to use ETFs because only those plans regulated by the Financial Services Authority are authorized to buy and sell stocks directly. It’s meant most pension funds instead opt for segregated mandates or pooled investment schemes. The new initiative will allow plan sponsors to buy and sell ETFs through their custodians—trades will be settled and held in their custody accounts with the custodian banks. Said Mark Johnson, head of iShares U.K., “It’s opening up a route to the market the client wouldn’t otherwise have. As the market leader, we have an obligation to grow the market and help new clients access ETFs.”

Initiatives like this show an important change in the ETF industry as more and more providers spend less time churning out new products and focus instead on making sure investors can actually buy them. Here’s hoping we see more of it.

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