Private equity firms are considering potential investments in companies that oversee ETF managed portfolios, according to a report this week.
“The big-hit sensation of the mid-2000s was anything ETF,” Liz Nesvold, managing partner of Silver Lane Advisors, said in a Reuters article. “Now the focus is on how to use the ETFs.” [iShares Sees Growing Demand for ETF Managed Portfolios]
There are about 1,460 ETFs now available in the U.S. and the market is flooded. In response, ETF model portfolio firms are cropping up, and these are companies that manage a portfolio made up entirely of ETFs, reports Jessica Toonkel for Reuters.
A model portfolio invests in selected ETFs, and a portfolio manager can interchange those ETFs. Private equity firms such as FTV Capital, Aquiline Capital Partners LLC, Century Capital and Grail Partners are all seeking to invest in ETF portfolio managers, according to the report. [Should Advisers use ETF Managed Portfolios?]
Currently, BlackRock’s iShares ETF business keeps one of the most comprehensive lists of model ETF portfolios available today. Called the iShares Connect Program, it includes the majority of providers in the U.S., with more than 200 strategies run by 104 managers with a total of $46 billion in assets, reports Toonkel. [Why Managed ETF Portfolios Are Hot]
According to BlackRock, the ETF model portfolio market is anticipated to hit $120 billion by the end of 2015. Some venture capitalists are expecting the model portfolio to be a mainstream investment soon.
A major challenge that model portfolios are experiencing is that providers may not have enough resources to sell their products. Assets are hard to gather and even those firms with a sales force find it difficult to distribute.
An ETF model portfolio can also be hard to sell because the performance of the portfolio is hard to discern. Many of the products are so new to market that a track record or performance history is not available. This is also a kink in the marketability thus far, but over time this will take care of itself. [Managed ETF Portfolios]
As investors are turning their heads away from traditional mutual funds, the ETF model portfolio may take the place of them. A model ETF portfolio is less expensive, with only management fees, more transparent, and present fewer potential conflicts of interest.
Tisha Guerrero contributed to this article.