According to a new research report from Cerulli Associates, a disproportionate focus on things like liquidity and expense ratios that are typically associated with the largest and most popular asset management companies introduces the risk of missing out on or ignoring better investment opportunities.
“Especially within the ETF space, we found that advisers tend to use big brand names as a proxy for quality and liquidity,” said Ed Louis, a senior analyst at Cerulli.
The research, which was sponsored by Rafferty Asset Management, the adviser to Direxion ETFs, shows that the three largest ETF providers represent 82% of all ETF assets. That market share jumps to 90% if you include the top five ETF providers.
A Cerulli survey of financial advisers lists investment performance as the leading attribute when allocating to an ETF, followed by liquidity and the expense ratio.
Liquidity is closely associated with a fund’s asset size because larger funds tend to have tighter trading spreads.
“When we spoke with advisers about why they were only using products from the largest brands, they talked about a hesitancy to use products from smaller issuers because they were concerned about things like liquidity and about the smaller funds possibly shutting down,” said Daniil Shapiro, an associate director at Cerulli.
“Part of the issue is that advisers tend to be exceptionally focused on costs, and they fear bigger bid-ask spreads will lead to higher transaction costs,” Mr. Shapiro said. “We’re saying advisers should evaluate a wider range of investment options and not just focus on a single product line.”
Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said an over-reliance on expense ratios and brand names is “hitting the easy button.”
“They will miss out on some high-quality products that offer a differentiated approach more consistent with how advisers choose individual stocks and bonds,” he said. “Fees have come down so much in recent years that what’s inside is a bigger driver of future results, and there are lots of compelling products that are under the radar but are worthy of attention for those willing to do a little extra homework.”
In fact, the focus on brands is so strong that investors are often bypassing zero expense ratios just for the solace that might come from investing in funds offered by the big five in the ETF space: BlackRock, State Street Global Advisors, Vanguard Group, Invesco and Charles Schwab Corp.
Three ETFs launched early last year that charge zero expense ratios combined had seen less than $70 million in net inflows through last month.
That compares to three more established ETFs from brand-name providers that charge 4 basis points and have seen combined net inflows of $3.9 billion over the same period.
If brand names are going to be the focus, advisers should at least take the time to find the best versions of strategies within those higher-profile fund companies.
In 2018, for example, State Street Global Advisors launched SPDR Gold MiniShares Trust (GLDM) as a 10-basis-point version of SPDR Gold Trust (GLD), which charges 40 basis points for the same strategy.
Later this month, SSGA will launch cheaper versions of existing ETFs tracking plain vanilla large, medium-, and small-cap indexes, which savvy advisers should be all over.
BlackRock made a similar move in 2012 when it launched iShares Core MSCI Emerging Markets ETF (IEMG) as a 14-basis-point version of iShares MSCI Emerging Markets (EEM), which charges 68 basis points.
Ultimately, even if advisers are intent on sticking to a brand name, there are often ways to add value by digging a little deeper.