Faster, lower cost, just as accurate – how ETFs are set to transform wealth management

Wealth Management and Private Banking

13 June 2019

InvestmentsWealth Management and Private BankingWealth Management and Private Banking


  • ETFs in general can be misunderstood. There is an assumption that all ETFs are driven by algorithms. Algorithms are used often in the make-up of ETFs, however, there is almost always a fund manager making the actual decisions. 
  • ETFs were originally set up for fund managers to use in their portfolios, giving access to a wide range of markets in relatively simple vehicles. Over time, it became clear that they could be used in a retail environment also.  As opposed to most investment vehicles, institutions and retail clients pay the same management fee for ETFs.
  • In terms of the market, most of the trading in ETFs is done on the secondary market. This trading does not create liquidity as the funds are only as liquid as the market.  However, it does make it easier to package up the investment and share it to investors.
  • The market is sizeable and growing. Overall the ETF market is currently c$5tn in size, of which c$1tn is in fixed income.  ETFs should not be confused with Exchange Traded Products (ETPs).  ETFs are a type of ETP, but they are by far and away the biggest vehicle.
  • There is a long tail in the ETF market, with a vast number of smaller funds. The critical mass of AUM is around $100m for the funds to survive.  Once the funds are up and running and there is enough AUM, ETFs are relatively simple to manage – managing the portfolios to the benchmark or other conditions required.
  • Broadly, ETFs are used as building blocks in portfolios. Many in the room agreed that ETFs are used primarily in portfolios to provide a low-cost basis of client portfolios.  However, the active space for ETFs is growing, at c$100bn in size now. 
  • ESG can mean different things in different markets. Examples cited include GM crops which the UK is agnostic towards, Europe dislike greatly, and the US see them as a key to solving world hunger.

Key challenges

  • There is a great deal of misunderstanding about ETFs, how they trade, and their liquidity. This could hinder investment and indeed, the overall growth in the asset class.
  • Active managers have a challenge in reducing and maintaining their costs when it comes to management. As shown by the growing popularity of ETFs in client portfolios, ETFs are being used to counteract this.  The ongoing challenge for active managers to maintain market share is to try and deliver alpha over and above fees, which is easier said than done.
  • ETF providers need to ensure their funds will be well subscribed, otherwise they run the risk of the funds folding where too little AUM is gathered. £100m is broadly the critical mass at which an ETF becomes economically viable.


  • Often, education is necessary for clients and intermediaries to understand ETFs better. This includes liquidity, trading, and pricing capabilities, all necessary for the vehicles to continue to grow in both reputation and AUM with institutional and retail investors.
  • The key is to understand what ETFs are and what they are not. Not all managers need the liquidity and trading capabilities and so the mechanics of the underlying assets and end-clients is important.  Managers still maintain a fiduciary duty and must be qualified to run the money.
  • The ETF market will grow in size and continue to become a key part of investment portfolios for clients. This is evident in the yearly growth of the industry.  As a result, regulators are increasing scrutiny and they receive much media attention.
  • ETFs are increasingly used to break into new markets. Larger fund managers who want to enter new and high-barrier markets can use ETFs, with their high liquidity and low cost, to break into markets, into which eventually they offer other vehicles.
  • Given the small margins in ETFs, the funds need to grow to a sizeable AUM ($100m) in a relatively short time and require extremely scalable technology behind them. This is because the margins are so small (fractions of bps) versus standard investment funds.  Further, in order to make them attractive there needs to be high liquidity in the funds.


Expert: Mark Fitzgerald, Head of ETF Product Management, Vanguard

Facilitator: Joseph Marti, Principal Consultant, Sionic Global