As the ETF market gets increasingly crowded, issuers often face an uphill battle finding distribution space for new funds, particularly when it comes to actively managed vehicles or those with novel strategies. A recent survey by Cerulli Associates found that 71% of asset managers said it is challenging to find shelf space for active ETFs on broker/dealer platforms. Overall, 96% of managers listed home approval on models/lists as a moderate challenge for distributing ETFs, including both active and passive vehicles.
“This is one of the most significant challenges that ETF issuers face regarding the distribution of active ETF products,” wrote Kevin Lyons, senior analyst, product development at Cerulli and one of the report’s authors, in an email.
As a result, ETF issuers view wirehouses rather than broker/dealer platforms as the best channel for growth, with 38% of survey respondents ranking wirehouses as their top choice for distribution. An additional 29% of issuers give their first preference to independent and hybrid RIAs, while independent broker/dealers and ETF model providers ranked first for growth opportunities with just 13% of respondents each.
According to Bryan Armour, director of ETF and passive strategies research, North America, at Morningstar, broker/dealers’ limited shelf space and new ETFs’ short track record are the main reasons asset managers might find it hard to place their products.
“Active ETFs should find more space once they prove their staying power,” he wrote in an email. “ETF share classes, once fully operationalized at B/Ds, largely solve these problems. They would benefit from a mutual fund’s longer track record and be offered next to it. In return, the ETF would improve the tax efficiency of the mutual fund.”
Broker/dealers also typically have a minimum asset threshold before they will consider listing an ETF product, noted Aniket Ullal, senior vice president and head of research at CFRA Research, in an email. That minimum is roughly around $50 million to $100 million in AUM, a figure that not all ETF issuers manage to reach within a year of the fund’s launch.
Ullal added that broker/dealers have to follow the SEC’s Regulation Best Interest rule, which requires them to both understand the risks and rewards of any recommended ETF, as well as only make recommendations that will be in the best interest of at least some retail investors. That makes them reluctant to approve ETF strategies with less reliable track records, such as leveraged ETFs or those that invest in emerging asset classes such as cryptocurrency, according to Ullal. “Active managers can also face challenges, since broker/dealer firms often require a performance track record before approving funds on platforms,” he wrote.