Ben Johnson On Beta As A Public Utility

May 24, 2018

Ben JohnsonBen Johnson, CFA, is director of global ETF and passive strategies research for Morningstar as well as editor of Morningstar ETFInvestorSM, a monthly investment newsletter. He will be a featured speaker at the upcoming Morningstar Investment Conference June 11-13 in Chicago. Morningstar used to have an ETF conference, but that now has been folded into your broader upcoming conference. What was behind that?

Ben Johnson: The intent of shutting down the ETF conference is embedded in the name of our conference, which is the Morningstar Investment Conference. We tend to think of investors as not necessarily being ETF investors or mutual fund investors exclusively, or not using active strategies or passive strategies exclusively, but in reality combining all of the above into the portfolios that advisors are building for their clients, that individuals are building for themselves, that institutions are building to meet whatever their mandate might be. Let’s talk about the ETFs. Tell me about the ETF strategist space Morningstar covers.

Johnson: We're looking at the ETF strategist space at a very high level. What's available in our database is what’s reported to us, trends in that space in terms of growth, in terms of your strategy development, you name it. And that’s just the tip of the iceberg with respect to more broadly what's going on in the world of ETF model building.

What’s not reflected in our database is the tens of billions of dollars in ETF model portfolios that are managed at the big wire houses and available to clients there, as well as portfolios in smaller regional broker-dealers within digital advice solutions, the so-called robo advisors. This is an area that's seen tremendous growth and has been a big contributor to the growth of ETFs. When I think of ETF strategists today versus six years ago, it seems it's kind of morphed into more of a corporate thing.

Johnson: Well put. Is it tougher to get an ETF portfolio on a platform now?

Johnson: I think of it like a general-admission rock concert in the middle of the summer. It's easy enough to get in, but to make your way up to the fence up against the stage is difficult, if not impossible, and ever-more difficult now that the big gorillas in the [ETF strategist] space are the ETF issuers themselves.

If you go a number of years back, they were trying to manage the delicate balance between trying to serve some of their fastest-growing clients—which were the smaller independent strategists—while simultaneously laying the groundwork that we now see has yielded benefits for them, which was, “By the way, we're going to compete against you directly.”

The message from the ETF sponsors was: “You're some of our biggest, some of our fastest-growing clients. Never in a million years will we dream of entering this space and competing with you directly.” And now what you see in terms of the mixed shift in the lead tables was that four of the top five [ETF strategists], as we measure it, are the ETF sponsors themselves that are not moving away entirely from selling individual slices, but making a good business in selling whole pies. The assets are concentrated basically with the big three ETF issuers (BlackRock, Vanguard, State Street). You could certainly argue that Invesco now is almost in that tier. What does that concentration mean to the investor?

Johnson: If you think of just beta or market exposure, it's kind of an industry unto itself. It's evolved into almost a somewhat-self-regulated public utility. Beta has become a utility. Do you ever see that momentum shifting away from the big three?

Johnson: The momentum might not necessarily shift but evolve. You’re already seeing evidence of the evolution in what we were discussing earlier, which is the [ETF] model space.

If there have been bouts of either fresh momentum among the big three or new momentum among relatively recent entrants, it's had to do with stepping in and selling whole pies.

Schwab has made way not by selling its individual ETFs on an a la carte basis, though that's certainly contributed; instead, look at the growth in Schwab Intelligent Portfolios—again, a whole pie that's delivered in a way that's very simple, very intuitive, very user-friendly. It's a set-and-forget, very efficient, very-low-cost solution that can serve a huge number of investors very well. In that context, what’s an advisor doing five years from now?

Johnson: The answer to that is ultimately going to manifest itself in all of the content you'll see at the conference. Part of it has to do with holistically looking at financial planning and differentiating oneself. Behavioral coaching is an element of it, too.

Contact Drew Voros at [email protected]

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