Growth in the exchange traded fund business is being fueled by the rise of the so-called fee-based compensation model for financial advisors, who are using ETFs to construct managed portfolios.
Fee-based advisors typically receive a percentage of assets under management from their clients. They key distinction is that their compensation is not based on commissions. In this arrangement, the advisor has incentive to grow the client portfolio rather than sell certain products or encourage trading.
“Most of the new money is going into fee-based, and most of that is going into ETF strategies,” said Scott Burns, director of ETF research at Morningstar, at the firm’s recent ETF Invest Conference.
Tony Rochte, head of the North American intermediary business group at State Street Global Advisors, said the transition from commission to fee-based models has accelerated the past few years, and ETFs have benefited from this trend. The financial products were initially used for “beta” or indexed market exposure, but now ETFs have wider applications and are being packaged within strategies, he said at the Morningstar conference.
The Chicago-based company earlier this month announced it plans to launch rankings and research on ETF managed portfolios.
“ETF managed portfolios are primarily separate account strategies that have more than 50% of a portfolio’s assets in ETFs,” according to Morningstar. “Of the more than 330 ETF managed portfolios with about $22 billion in assets currently tracked by Morningstar, approximately 30% were launched within the past three years and the number continues to increase.”
Andrew Gogerty, ETF managed portfolios strategist for Morningstar, said managed portfolios are a burgeoning area in the investment world. “These strategies typically offer greater tactical flexibility than a traditional individual security separate account strategy,” he said in a press release. “Our goal is to develop a suite of analytics and commentary that will help advisors and other investors who are sifting through these investment options.” [Morningstar to Rank ETF Managed Portfolios]
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.