In our previous blog, we sat down with Nick Elward, SVP, Head of Institutional Product and ETFs of Natixis Investment Managers to discuss active management and the momentum of ETFs. In this second part, we examine what firms need to consider not only when entering the exchange traded space, but also what involvement is required from the firm.
What criteria/expectations must Natixis ETF vendors meet? Natixis is very focused on partnering with vendors who can provide three main values. First, we seek a vendor who has an outstanding product or service. This is a foundational requirement before moving on to the next requirement. Requirement #2 is to find a vendor who provides outstanding service—specifically, one who actively communicates and one who works with us to solve business problems. The last requirement for the vendor is to offer their product or service at a fair price.
Why did you choose your current ETF vendors? We chose our current vendors based on the above three main criteria. As for details, we performed due diligence on each (along with a shortlist of other competitors). This due diligence included interviews and a requirement that they document their capabilities and controls via an RFI. On an ongoing basis, we typically perform on-site due diligence for each vendor.
How will the active semi-transparent ETFs be supported by the sales organization? The active semi-transparent ETFs will be supported in an identical way to how we support our transparent ETFs. Our 100+ person client-facing team will address existing clients’ questions and will seek to find new investors for the products. We also plan to secure platform placement for the new ETFs to facilitate transactions for clients and prospects.
How did Natixis work with key distribution partners during the product development process? We hosted dozens of meetings with members of the research team and business strategy teams at key client firms, including B/Ds and custodians. We were able to ask questions to confirm our product design and investment strategies for launch and address their questions about how the product would work. We will keep these lines of communication open as we near the launch and afterward.
How would you describe your conversations with due diligence teams about this structure relative to attempts to introduce new mutual fund or SMA strategies? The due diligence teams have asked a lot of good questions related to the way that the proxy portfolio will work—as a reminder, the proxy is the portfolio of stocks that market makers will use to get a sense of how the actual portfolio will perform on a given day. The closer the proxy and the actual portfolio are correlated, the tighter market makers will set ETF spread. The due diligence teams have also been interested in determining the types of investment strategies we plan to launch as semi-transparent ETFs—specifically, whether these ETFs will be clone-like or all-new strategies.
How are advisors reacting to these models, whether active ETFs or semi-transparent active ETFs; or is it still too early to see those reactions? Early-adopter-type FAs are very interested in semi-transparent ETFs. They are most interested in the aggressiveness of the expense ratios and the tax efficiency. However, there’s also a group of FAs who want to see these new products in-market for a while before investing.
Have there been particular concerns that need to be addressed at the Board level as mutual fund trustees become aware of this new structure? There was an educational component to the discussions, in order to ensure the Board understood the differences between MFs and ETFs. We covered this in 2015-16. More recently, there has been an educational effort around describing the differences between transparent ETFs and semi-transparent ETFs. There was also a need to inform the board about their active semi-transparent ETF oversight responsibilities.
What additional resources have been required to develop and launch these products? The sales organization is obviously impacted, but what about other areas including investment management, compliance and operations? The additional resources are mostly related to legal, compliance and operational support to bring these new ETFs to market. After the launch, the ETFs will fall into business-as-usual. Sales and Key Account work will be increased after the launch as we seek initial client assets and platform placement.
Some say that the ETF marketplace has become saturated as most asset classes are covered by established funds. Given the limits of these models, what opportunities, in your opinion, exist for newcomers to the ETF space to utilize these models? There are a lot of investment products in the marketplace, but there will always be a place for a structure that can help generate alpha, can reduce costs and create more tax-efficiency. We look forward to seeing what the future holds for active semi-transparent ETFs.
Download our "Semi-Transparent Exchange Traded Funds: A Revolution in Active Management" whitepaper to understand how semi-transparent ETFs contribute to the momentum of ETFs.