A Cambrian Explosion In ETF Innovation

Julius Buchanan, Editor in Chief, Wealth Solutions Report

Regulatory Shifts And Client Needs Drive Rapid Creation Of Unique ETFs That Advisors Can Employ To Enhance Client Portfolios

Evolution is used as an analogy in wealth management and other industries to describe a state of constant adaptation to a changing industrial environment – and if evolution accurately describes the changes we have seen in wealth management in recent years, then the Cambrian explosion is a fitting metaphor for innovation in ETFs.

Regulatory changes, client awareness and demand, and technological innovation are converging to bring ETFs with new strategies and distinctives into existence. As with other areas of wealth management, advisors must become constant learners to provide cutting-edge knowledge and advice on ETFs to clients.

Recent Innovations

Brian Kelleher, Chief Revenue Officer, Simplify

“The number of issuers has increased significantly and the range of products that they are able to offer is incredible. The ETF market has moved so far beyond basic beta strategies,” says Brian Kelleher, Chief Revenue Officer of Simplify.

“The use of options, futures, and other derivatives are becoming more understood and utilized by allocators,” he continues. “Advisors understand that they must provide more robust portfolios that can meet investor needs across different market environments. So, they are seeking out products that can offer diversification, hedging and other portfolio needs.”

Greg Bassuk, CEO, AXS Investments

Jake Hanley, Managing Director and Senior Portfolio Strategist at Teucrium, points to the surge in the number of thematic ETFs used by younger investors to implement their investment views. He also points to an expansion in active ETFs, which he says are “a timely development considering the recent selloffs in both stocks and bonds in 2022 and 2023. The introduction of active strategies within ETFs caters to the evolving market dynamics.”

Greg Bassuk, CEO of AXS Investments, identified access to unique investment exposures as a recent ETF trend. He also notes that institutional strategies arez becoming more available to retail investors through ETFs, since many institutional strategies can meet regulatory requirements on liquidity and transparency.

Regulatory Shifts And Client Demand

Jake Hanley, Managing Director & Senior Portfolio Strategist, Teucrium

Kelleher notes significant rule changes in recent years from the SEC on ETFs and derivatives have “created a tremendous amount of innovation in the ETF space.”

Similarly, Hanley points out that “regulatory shifts have indeed facilitated the emergence of active ETFs. The surge in active ETFs is attributed to the ‘ETF Rule’ introduced by the Securities and Exchange Commission in 2019, simplifying the launch of diverse fund types.”

Hanley says that investor demand for access to alternative markets is also driving ETF innovation. “We’ve observed a growing appetite for alternative strategies, leading to the introduction of products that offer exposure to alternative asset classes and trading strategies, which were traditionally confined to institutional offerings like hedge funds.”

Kelleher agrees that client demand has pushed change, noting that portfolios predominantly based on equity and interest rate risk fell short. “The challenge for a lot of investors has been getting access to true alternative investments. The ETF structure is being used to innovate and bring true alternatives, not just to institutions but to all investors.”

Bassuk also identifies client needs as a catalyst causing them to seek tools that provide diversification beyond traditional portfolios. “Just like institutional investors have done for decades, individuals need diversified investment exposures with the potential to offer strong growth, income and diversification potential.”

Innovation Examples

Addressing the trend Bassuk mentioned of making institutional strategies available for retail investors, he points to his firm’s recently established ETF that invests in commercial and residential REITs, as well as an ETF providing exposure to “protect against the pernicious impacts of inflation and to simultaneously benefit from investments that historically benefit from a high price environment.”

Hanley gives two of his firm’s machine learning-driven ETFs that trade long and short commodity futures contracts as examples of innovation, one trading in agricultural products and the other in base metals.

Kelleher points to several recent ETF launches by his firm that employ strategies in managed futures, multiple quantitative investment strategies (multi-QIS), and a market neutral equity long/short ETF.

On The Horizon

Contemplating the future for ETFs, Kelleher says, “The alternatives space remains ripe for disruption.”

Similarly, Bassuk says that he sees many innovations forthcoming that will provide unprecedented types of ETFs to support unique investment exposures.

“I anticipate sustained growth in the active ETF domain, with many actively managed mutual funds considering a transition to ETFs,” states Hanley. “This shift is likely propelled by the inherent advantages of ETFs, such as intraday liquidity and potential tax benefits. Given these perks, investors should naturally prefer ETFs if they can achieve comparable exposure and performance at the same, or lower cost.”

Julius Buchanan, Editor in Chief at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com.

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