A chang­ing land­scape

A dif­fer­ent model and new tech­nol­ogy can drive ETF growth, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Feature — Etfs -

Due to mar­ket sat­u­ra­tion in cap-weighted ex­change traded funds (ETFs), is­suers have sought to in­no­vate to dif­fer­en­ti­ate their of­fer­ing, while also look­ing to de­liver mar­ket­beat­ing re­turns.

A num­ber of non mar­ket­cap­i­tal­i­sa­tion in­dex-weight­ing strate­gies have emerged, led pre­dom­i­nantly by smart beta funds that lever­age rules-based in­vest­ment strate­gies.

Ad­di­tional in­no­va­tion has taken the form of ac­tive ETFs and funds that of­fer emerg­ing mar­ket ex­po­sure, ac­cess to im­pact in­vest­ing via en­vi­ron­men­tal, so­cial and gov­er­nance ETFs or ex­po­sure to hy­per­growth sec­tors such as cannabis, in­dus­try 4.0 tech­nol­ogy or cryp­tocur­ren­cies.

The pace of this mar­ket in­no­va­tion also ac­cel­er­ated fol­low­ing the ETF in­dus­try’s race to the bot­tom in terms of pric­ing, be­lieves Charles Sav­age, CEO at Pur­ple Group. “Now that we have zero-rated ETFs, cost is no longer a dif­fer­en­tia­tor. Is­suers are grap­pling with how to dif­fer­en­ti­ate them­selves and com­pete on no mar­gin.”

A shift to a plat­form-based busi­ness model seeks to im­prove the cus­tomer ex­pe­ri­ence, and en­ables is­suers to own the in­vestor re­la­tion­ships from end to end, Sav­age says.

“Ma­jor is­suers in the US like Black­Rock and Van­guard are al­ready build­ing or buy­ing plat­forms. Plat­form plays aim to craft a seam­less, fric­tion­less user ex­pe­ri­ence, and of­ten lever­age be­spoke con­tent to en­hance en­gage­ment by shar­ing exclusive re­search and pro­vid­ing in­vestor ed­u­ca­tion.”

Th­ese fea­tures res­onate with mil­len­nial in­vestors in par­tic­u­lar, who are no longer happy to be pas­sive pas­sen­gers on their in­vest­ment jour­neys, says Sav­age. “They want to be em­pow­ered with in­for­ma­tion and play ac­tive roles in the in­vest­ment de­ci­sion-mak­ing process. So those is­suers that can de­liver the right mix of func­tion­al­ity and us­abil­ity via a plat­form stand to cap­ture sig­nif­i­cant mar­ket share.”

This is also an im­por­tant strate­gic move be­cause ETF mar­ket di­ver­si­fi­ca­tion has given in­vestors a broader uni­verse of in­vest­ment op­tions. “It is there­fore vi­tal for in­vestors to ed­u­cate them­selves about the risks in­volved in in­vest­ing in sec­tors like hy­per­growth mar­kets to limit their ex­po­sure to volatile in­vest­ments,” says Steven Empe­do­cles, port­fo­lio man­ager at Syg­nia.

This abil­ity to share in­for­ma­tion and en­gage and em­power in­vestors will help to el­e­vate the per­ceived value of the of­fer­ing, con­tin­ues Sav­age. “Charg­ing 1% then be­comes more jus­ti­fi­able and palat­able.”

Plat­form plays will also cre­ate op­por­tu­ni­ties to in­te­grate new forms of tech­nol­ogy into the value chain.

“A lot of noise has been made about the po­ten­tial for robo-ad­vi­sors to dis­in­ter­me­di­ate the bro­ker. But we’re see­ing a shift to a hy­brid model blend­ing dig­i­tal en­gage­ment, ideal for low-level tasks, with hu­man in­ter­ac­tion for higher-or­der ad­vice and re­la­tion­ship build­ing,” adds Sav­age.

Ad­vance­ments in tech­nol­ogy have also in­creased the ef­fi­ciency of back-end sys­tems, adds Empe­do­cles.

Un­for­tu­nately, much of this in­no­va­tion is hap­pen­ing in more ma­ture mar­kets and there­fore re­mains some way off. “SA is a lag­gard in terms of driv­ing in­no­va­tion — it’s more of a mar­ket that tracks US trends,” says Sav­age. “But there are op­por­tu­ni­ties for those brave enough to in­no­vate.”

For ex­am­ple, Syg­nia’s Itrix 4th in­dus­trial rev­o­lu­tion global eq­uity ETF, which in­vests in com­pa­nies that are paving the fu­ture of tech­no­log­i­cal growth, has per­formed well since in­cep­tion. “This fund is a great ex­am­ple of how in­dus­try 4.0 tech­nolo­gies can be lever­aged,” says Empe­do­cles.

Mar­i­juana, or cannabis, ETFs are an­other ex­am­ple of how in­no­va­tion can drive ex­po­nen­tial growth. North Amer­i­can in­vestors have piled into ETFs that track so-called “pot stocks”. “The mar­i­juana in­dus­try is def­i­nitely a ma­jor African and SA op­por­tu­nity, but only if gov­ern­ments move quickly to amend leg­is­la­tion and re­move the red tape to make it com­mer­cially vi­able. Backed by ETF funds, this trend could light up the agri­cul­tural sec­tor, cre­ate greater op­por­tu­ni­ties for emerg­ing farm­ers, and stim­u­late the economies of coun­tries such as SA, Le­sotho, Swazi­land and Malawi,” says Sav­age.

“Un­for­tu­nately, this ideal re­mains some way off. Even with leg­isla­tive amend­ments, lo­cal de­mand, which is lim­ited due to the rel­a­tive size of the in­vestor pool, will ul­ti­mately dic­tate how much lo­cal is­suers are pre­pared to in­no­vate.”

ETF mar­ket di­ver­si­fi­ca­tion has given in­vestors a broader uni­verse of in­vest­ment op­tions

Pic­ture: 123RF — VINNSTOCK

Charles Sav­age … a range of op­tions

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