The ETF industry has been around for over 20 years at this point, but over the past 5 years the ETF industry has captivated the investment world. I’ve had a front seat on the action, launching over 650 exchange traded products while I was an associate at the NYSE in the Global Indexing and Exchange Traded Product Group. We built indexes for ETFs, participated on weekly calls with the SEC trying to get approval for innovative ETFs that fell outside the standard rules, and guided new ETF issuers through the whole process.  It was here that I learned one important fact of a new ETF: You, the financial advisor, will never see a bad backtest for an ETF. If the investment idea had a poor backtest, it didn’t make it to market.

I transitioned to RevenueShares to be their Head of Capital Markets, which we grew from $450 million to $1.1 billion and was eventually sold to the mutual fund giant, Oppenheimer Funds. During my seven years in the industry I’ve witnessed that some industry players were prepared, some were caught flat footed, and some are still trying to figure out what to do next.

In this piece, Wes asked me to share some insights on the ETF industry and where it might be heading based on some trends I’ve witnessed. I’ll start this essay with a recap of recent merger and acquisition activity in the ETF space, then discuss why advisors are back in the driving seat, mention briefly some trends in ETF product development, and end with some discussions of what we could expect going forward.

Modified slightly from the original

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ETFs Create Disruption: Do You Buy Your Way Into the Business?

In 2014 and 2015 there was a wave of ETF company acquisitions by large asset management firms. The reason was simple: if an asset management company was not in the ETF game, they realized they really needed to get in it. ETFs were not a fad that was going away.

Asset management firms had two options:

Some asset managers chose option 2: IndexIQ was acquired by New York Life. Janus bought VelocityShares. Oppenheimer Funds bought RevenueShares (full disclosure: my former employers). Hartford Funds acquired acquired Lattice Strategies. Columbia Threadneedle bought Emerging Global Advisors. Victory Capital acquired Compass EMP.

If you’re a big asset management firm acquiring a small ETF firm, you want to lever your strengths (your brand, large distribution force, and large amount of capital). You need to acquire an ETF company that enables you to do that. The sweet spot for an acquisition is an ETF company that is small enough in assets under management (AUM) that it isn’t an impossibly steep price, yet large enough in assets that your firm has a head start on distribution and marketing. Combine that sweet spot of assets with a decent length of time for their ETFs track record, and you have a company that is an ideal acquisition target.

If you examined the list of ETF Companies in the U.S. at the start of 2014, there was a decent number of acquirable firms in that AUM and track record sweet spot: ~$500 million?—?$5 billion in AUM and three to eight years of track record.

At the start of 2017, the ETF landscape looks very different for potential ETF company acquirers.

Looking at the ETF league table from ETF.com, let’s categorize all the ETF product lines/companies that have over $1 billion in AUM. I’ll use some very official divisions to categorize why they’re either totally not acquirable or near impossible (A.U.M. numbers below as of April 5, 2017).

The “You Can’t Buy Us, but Maybe We’ll Buy You” Division

The Privately Owned/Unicorn Division:

The “Already Acquired By, or Started By, a Larger Wealth Management Firm” Division

(This division is interesting because you *could try to convince some of these firms* that a spin off of their ETF business would enable it to achieve its full value. We’re assuming that’s too complicated and these firms want to hold on.)

The “We Started Later, But Are Choosing To Go It Alone” Division

The “I’m Kinda Seeing Someone Already” Division

The Exemptive Relief Division

The Wisdomtree Division

(Can they be bought? Yes. Will they be bought? They’re often thrown around as a target acquisition for one of the behemoth asset management firms, but likely too large and too expensive now.)

OK. That is every ETF company/product line that has over $1 billion in assets. None of them are really acquirable. Yes, there’s always a price, but any firm that can buy the firms above, it probably doesn’t make sense to, and any firm that would like to acquire the firms above, can’t.