ETF...A Star Is Born

It's been just over 20 years since the first official ETF began trading and while the first decade saw modest growth, the adoption rate of investors over the last 10 years has been nothing short of meteoric. ETF's now represent a formidable component of the overall portfolio allocation pie for investors. Recent estimates put ETF assets at approximately $2.75 trillion with forecasts to reach $5 trillion over the next 5 years.

The eyes of the broad retail and institutional investment community are now looking more and more toward the fee savings and tax advantages to be achieved through ETF investing and they like what they see. As the ETF industry continues to expand, investment managers offering ETF products are working to position themselves to best capture future growth and they are realizing that this can't be achieved profitably without investing in the build out of a proper operating model with sound technologies in order to support it.

This rapid period of growth has resulted in several areas of strain for ETF managers and created opportunity as investors continue to flock in increasing numbers into this area. Software vendors and service providers initially began to support the ETF market needs on the bones of legacy mutual fund oriented systems and processes. While it was not too difficult to support such needs this way in limited volumes, the myriad of workarounds and manual interventions have added up as the number of funds and assets have grown. This growth, coupled with the broadening complexity of the ETF investment strategies, has presented very real risks. Plans for scalable and profitable growth to coincide with the increased assets have been restrained by the manual approaches necessary to bridge the gap between available technology and business demands. Leaders in this space have lived through the pain of forcing a square peg through a round hole that is inherent with using traditional mutual fund based approaches and have begun to develop platforms targeted specifically to meet the nuanced needs of the ETF community.

Vendors have been slow on the uptake. ETF shops across the industry have been forced to develop their own black boxes to meet their business technology needs to varying degrees of success. While vendor offerings are certainly a part of the general solution ETF managers deploy, the workarounds and bespoke solutions required to fill gaps and connect all the pieces still play a significant role in the platforms used across the market.

Market trends and investor behaviors strongly indicate that ETF's are in a prime position to experience continued significant growth for the foreseeable future. Firms offering ETF products will need to make corresponding investments in their technology infrastructure and operating models if they intend to capitalize on this growth opportunity. Those who understand the nuances of the ETF business and have a good perspective on the competitive landscape are implementing best of breed solutions and separating themselves from the herd in this increasingly competitive space where speed to market makes a huge difference.

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Derek Pratt

Derek Pratt is a Director with Citisoft and is a veteran of over 25 years in the financial services industry. Derek is skilled in investment operations, data management and governance, solutions architecture, outsourcing, operating model design and implementation, as well as program & project management. He has a record of excellence in outsource service provider selections and integrations, systems selections and implementations, operations management, strategic business analysis, and operating model design.