2019 was a busy year for the markets, and especially for the ETF industry. Global markets ended the year positive, despite a lot of geopolitical uncertainty around trade tensions between the US and China and an overall dovish Fed outlook. The SEC passed new ETF regulation which eliminated exemptive relief, trading commissions were slashed to zero by major brokerage houses, and the non-transparent/semi-transparent active structures took off as all five structures were approved by the SEC.
The ETF Rule
Quite possibly the biggest change to the ETF industry came with the passing of the new SEC rule 6c-11, also known as the ETF Rule. The passing of the ETF rule fits into the overall Trump administration’s goals to streamline regulation and make it easier for businesses to come to market. The main goal of the rule was to require more transparency in the industry and therefore leave it up to the investor or fiduciary to decide whether a product is suitable.
The biggest change brought about by the new ETF Rule was the elimination of exemptive relief. Moving forward in 2020, ETFs that meet certain criteria are notrequired to file for exemptive relief. This lowers the barriers to entry for the ETF industry, and will undoubtedly lead to more traditional fund providers and hedge funds launching products in the ETF wrapper.
Additionally, the ETF rule brought about new requirements which will help to increase transparency and investor education. Based upon our conversations with clients, the biggest change is the additional requirement to disclose daily the 30 day median bid/ask spread of an ETF calculated at every 10 second interval.
In 2020, there is no doubt that the competition in the ETF industry will become even fiercer, and many more products will launch now that the expensive and lengthy process of SEC exemptive relief approval is removed.
Fee/Commission Price Slashing
2019 also saw consistent fee slashing across the industry in what many refer to as “the race to zero.” At the beginning of the year, and even earlier in 2018, we saw many ETF issuers slashing expense ratios in order to offer the lowest fees to investors and help drive AUM growth.
In October, Schwab made an announcement which rocked the brokerage industry: they would be slashing all trading commissions for stocks and ETFs to $0. This led to other major brokerages following suit, and by the end of 2019, nearly all the major brokerages had slashed commission fees for stocks and ETFs to zero. At the end of November, Schwab bought TD Ameritrade for a stock deal worth $26 billion.
While it seems like an overall positive in the short term that the cost to trade and invest has been lowered, the practice of zero trading commissions has put many on edge. At the end of the day, a brokerage is a business. Without revenue from trading commissions they will now have to turn to less transparent models in order to stay profitable. This could include selling order flow, selling shelf space on their platform to fund companies, or by charging more opaque fees and commissions on orders. In 2020 we expect to see further consolidation in the brokerage space, as firms will need to find new revenue streams in order to survive.
Non/Semi-Transparent Sctructures
In 2019, there was a ton of anticipation around active ETFs that do not have to disclose daily portfolio holdings. Although not a new concept (Vanguard already has ETFs that only disclose holdings on a monthly basis with a 15-day lag), industry interest in the idea of less-transparent active ETFs increased significantly. These structures go by many names, and while the jury is still out on what exactly to call them, for the sake of our recap we’ll call them non-transparent active ETF structures. In 2019 a total of five different structures emerged from Precidian, Blue Tractor Group, NYSE, Fidelity, and T Rowe Price.
By the end of 2019, all 5 structures had received approval from the SEC. It is now just a matter of time until products launch with these new structures. We expect American Century and Legg Mason to be some of the first-to-market, both of which are using the Precidian structure. While there will undoubtedly be a lot of investor interest in these products, the business model and strategy for issuers to gather assets will not be the same as the traditional ETF model. We feel retail investors will shy away completely because liquidity and premium/discounts will be expensive, and growth of these structures will be primarily driven by traditional mutual fund investors.
What this all means for 2020…
2019 was dominated by major headlines which will certainly change the investment landscape moving forward. In 2020, we expect to see increased competition as more issuers enter the space and increased innovation as products launch under the new semi/non-transparent structures.
Quite possibly the biggest change to the ETF industry came with the passing of the new SEC rule 6c-11, also known as the ETF Rule. The passing of the ETF rule fits into the overall Trump administration’s goals to streamline regulation and make it easier for businesses to come to market. The main goal of the rule was to require more transparency in the industry and therefore leave it up to the investor or fiduciary to decide whether a product is suitable.
The biggest change brought about by the new ETF Rule was the elimination of exemptive relief. Moving forward in 2020, ETFs that meet certain criteria are notrequired to file for exemptive relief. This lowers the barriers to entry for the ETF industry, and will undoubtedly lead to more traditional fund providers and hedge funds launching products in the ETF wrapper.
Additionally, the ETF rule brought about new requirements which will help to increase transparency and investor education. Based upon our conversations with clients, the biggest change is the additional requirement to disclose daily the 30 day median bid/ask spread of an ETF calculated at every 10 second interval.
In 2020, there is no doubt that the competition in the ETF industry will become even fiercer, and many more products will launch now that the expensive and lengthy process of SEC exemptive relief approval is removed.
Fee/Commission Price Slashing
2019 also saw consistent fee slashing across the industry in what many refer to as “the race to zero.” At the beginning of the year, and even earlier in 2018, we saw many ETF issuers slashing expense ratios in order to offer the lowest fees to investors and help drive AUM growth.
In October, Schwab made an announcement which rocked the brokerage industry: they would be slashing all trading commissions for stocks and ETFs to $0. This led to other major brokerages following suit, and by the end of 2019, nearly all the major brokerages had slashed commission fees for stocks and ETFs to zero. At the end of November, Schwab bought TD Ameritrade for a stock deal worth $26 billion.
While it seems like an overall positive in the short term that the cost to trade and invest has been lowered, the practice of zero trading commissions has put many on edge. At the end of the day, a brokerage is a business. Without revenue from trading commissions they will now have to turn to less transparent models in order to stay profitable. This could include selling order flow, selling shelf space on their platform to fund companies, or by charging more opaque fees and commissions on orders. In 2020 we expect to see further consolidation in the brokerage space, as firms will need to find new revenue streams in order to survive.
Non/Semi-Transparent Sctructures
In 2019, there was a ton of anticipation around active ETFs that do not have to disclose daily portfolio holdings. Although not a new concept (Vanguard already has ETFs that only disclose holdings on a monthly basis with a 15-day lag), industry interest in the idea of less-transparent active ETFs increased significantly. These structures go by many names, and while the jury is still out on what exactly to call them, for the sake of our recap we’ll call them non-transparent active ETF structures. In 2019 a total of five different structures emerged from Precidian, Blue Tractor Group, NYSE, Fidelity, and T Rowe Price.
By the end of 2019, all 5 structures had received approval from the SEC. It is now just a matter of time until products launch with these new structures. We expect American Century and Legg Mason to be some of the first-to-market, both of which are using the Precidian structure. While there will undoubtedly be a lot of investor interest in these products, the business model and strategy for issuers to gather assets will not be the same as the traditional ETF model. We feel retail investors will shy away completely because liquidity and premium/discounts will be expensive, and growth of these structures will be primarily driven by traditional mutual fund investors.
What this all means for 2020…
2019 was dominated by major headlines which will certainly change the investment landscape moving forward. In 2020, we expect to see increased competition as more issuers enter the space and increased innovation as products launch under the new semi/non-transparent structures.
