As an observer of ETF trends, I've recently noticed a growing number of active ETFs launching that deliver a healthy dose of investment insight at a price point that makes many index and active ETFs blush. These funds represent a leap beyond the smart index / beta movement as they combine both low cost and a dynamic pursuit of alpha.
Low cost "insight ETFs" are portfolios that actively play out an investment manager's view of the markets, individual securities and in some cases other ETFs. They are similar to the average actively managed ETF, less a significant amount of cost. How much? I currently view a low cost actively managed ETF as 60bps or less. The 60bps is well below most actively managed ETFs, which tend to price around 1% on average. In addition 60bps is a thumbnail price point for the average less insightful enhanced index based ETF peer group.
A great example of an insight ETF is the RiverFront Strategic Income Fund (RIGS). The RiverFront Investment Group is a Richmond, Virginia based registered investment advisor (RIA) managing close to $4 billion of assets for clients. The firm has a history of embracing ETFs as part of their client portfolios.
In October of 2013 RiverFront launched RIGS, an ETF that provides the public – not just RiverFront clients – with the ability to access its proprietary investment process and outlook when it comes to income investing. With a management fee of just .22%, the ETF is easily a bargain for investors. Why? Clients pay fees to work with a typical RIA – before the cost of any investment products – often equal .5 to 1% a year on assets. (Of course RIAs offer much more expertise beyond income portfolios but a .22% fee on an income slice of a portfolio is compelling.)
By my count here are the four low cost RIA based ETFs that have recently launched.
While investors get low cost ETF portfolios that are bathed in investment insight, what do RIAs get? After all, some would say the asset managers are cannibalizing their own business. Two clear opportunities RIAs might take advantage of are the increase accessibility to investors ETFs provide and the greater awareness the firm and its investment process will experience through being an ETF manager.
A new ETF immediately increases the RIAs' reach within the U.S. investment marketplace. Investors simply purchase the ETF on the NASDAQ or NYSE to access the firm's investment approach. This pales in comparison to the paper work and formalities surrounding becoming a client of an RIA. Secondly, ETFs provide the RIA with immediate national attention as research and media outlets begin coverage of the ETF.
Many RIAs are focused on marketing in a metro area or region of the country, so the new national attention substantially boosts the firm's profile and potential client base. Thus RIAs are likely to be able to harvest benefits well beyond their management fee when it comes to launching a low cost ETF.
In 2014, look for more RIAs to take the plunge and launch their own low cost ETFs. This trend decreases costs while increasing investment selection for investors. At the same time it provides RIAs and other asset management firms with a more visible platform of which they can demonstrate their expertise on. In my mind this is a win for both parties and a trend that bodes well for the continued evolution of the ETF industry.