Wells Fargo and Dimensional Show Big ETF Holdouts Are Buckling

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Advisor Perspectives
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It’s taken three decades, more than $4.5 trillion in assets and a change to the rules. But some of the most reluctant money managers on Wall Street are finally ready to embrace exchange-traded funds.

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Wells Fargo, Federated Investors and Dimensional Fund Advisors could all launch their first ETFs in the near future, according to filings and company statements. If they debut in 2020, they’ll be following T. Rowe Price and BNY Mellon, which entered the market earlier this year.

The five giants, which boast more than $6 trillion of managed assets combined, represent a potential new growth avenue for an American ETF industry already in unchartered waters. The moves also underline the seismic shifts underway in the business of asset management.

“These long holdouts recognize that if they’re not in the industry and give their investors a choice, they’re going to be at a disadvantage,” said Reggie Browne, principal at GTS Mischler. “You’re going to hear more people like Wells Fargo jump in over the next 12 months.”

U.S. mutual funds had $278 billion in outflows in the first half of the year, including the first-ever drawdown for index-tracking products in a semi-annual period, according to Bloomberg Intelligence. American ETFs posted inflows, and assets hit a record last week.

According to the new entrants, it’s all about this demand. Gerard O’Reilly, co-chief executive officer at DFA, said the financial professionals it works with wanted ETFs as an option. Stephanie Pierce, CEO of BNY Mellon Investment Management’s ETF and index business, said the funds were fast becoming the vehicle of choice for clients.

Spokespeople for Wells Fargo and Federated declined to comment.

ANT Farm

Industry experts say the capitulations were inevitable given the low cost and ease of use of ETFs. Yet rule changes last year may have helped accelerate the process.

First, the Securities and Exchange Commission standardized and streamlined the approval process for new funds and made it easier to run ETFs that buy hard-to-find, or less liquid, securities. A few months later, it approved the first active, non-transparent structures — which at least one new entrant is using.

Known as ANTs, this breed of funds help money managers offer their strategies in an ETF wrapper but with lower disclosure requirements, shielding them from front-running and copycats.

“Final approval of these ANTs is a huge driving factor,” said Bloomberg Intelligence analyst James Seyffart. “They probably would have gone into ETFs in the next few years, but with the ANTs, they’re like, ‘This is what we’re going to cling to, this is what we want.’”

Read the full article here by Claire Ballentine, Advisor Perspectives

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