Every mutual fund and ETF manager needs a strategy to either enter into or expand in the fast growing $2.6 trillion global ETF industry. This raises the question of what marketing and product strategies may be most effective for providers in growing and retaining assets.
The risk for an ETF provider is that its marketing strategy can get diluted over time into a grab-bag of marketing tactics (e.g. tweaking social media campaigns or adjusting conference sponsorship schedules) that don't achieve broader business goals. An analysis of ETF market share data shows that the biggest gains go to firms that can win at two levels: At the product level when they maximize "product-environment" fit, and at the franchise level when they have a distinct "calling card."
* Product-Environment Fit: The most successful ETF products in the last two to three years have been those where the investment objective of the ETF has been tightly aligned with the prevailing market or economic environment. For example, Wisdom Tree aggressively promoted its Japan Currency Hedged ETF (DXJ) in an environment when the Japanese government was stimulating growth through a policy that would result in the Yen's depreciation. DXJ went on to take in $9 billion in assets in calendar year 2013. Similarly, SPLV, the PowerShares S&P 500 Low Volatility Portfolio, was launched in 2011 when equity investors were still wary after the 2008 downturn. Investors were looking for products that allowed them to retain equity exposure while lowering their downside risk in the event of another correction. As of end June 2014, that ETF had $4.2 billion in net assets.
In the ETF industry, it is received wisdom that being first to market in a category is the key to success. However real success is not about being first to market but first to achieving this type of "product-environment" fit. Once an ETF has established a strong product-environment fit, it may be hard to dislodge from its leadership position. This has important implications for sponsors of ETFs. It indicates that marketing and distribution strategies should originate from an in-depth understanding of investor concerns about the prevailing market environment. In today's environment, investors are concerned about the impact of rising interest rates on income producing vehicles such as bond, REIT and dividend ETFs; potential corrections in high risk assets such as emerging market equities and the slowing economic growth in China. The most effective marketing teams and wholesalers will use these issues as discussion points, rather than focusing the discussion solely on their existing product toolkit.
* Having a Distinct Franchise Calling Card: ETF asset trends show that the most successful ETF sponsors are those whose franchises are very clearly associated with a unique set of benefits or features that investors' value. The best example of this is Vanguard, which has been strongly associated with low cost, index-linked investing over several decades, and has built a retail investor base on this association. This has enabled it to become the fastest gainer of ETF market share in the U.S., even though it was not a first mover in virtually any ETF investment category. Similarly, Blackrock's iShares has been associated with product breadth for both core and satellite holdings, and high quality education and tools for financial advisors. They have reinforced this in recent months by clearly identifying some of their ETFs as being core holdings. Having a distinct franchise calling card can also be a highly effective entry strategy. Firms like Direxion and ProShares have been strongly associated with inverse and leveraged ETFs that appeal to professional traders or hedge funds who want to take directional bets on specific market segments. This allowed them to establish themselves in the industry, which then provided the foundation to expand into other product areas.
As the case of Vanguard shows, this strong franchise level brand association is very powerful. It creates broad asset gathering momentum across the entire product line, relieving the pressure to hit home runs in individual categories. This has implications for potential new entrants in particular. Mutual fund companies looking to launch ETFs should first have an in-depth understanding of whether their franchise is associated with a distinct set of benefits or features that ETF users will value highly. For example, are they perceived as having deep expertise in specific segments of the capital market such as fixed income, commodities or emerging markets? This can form the basis for an effective strategic product and marketing plan.
The most effective use of marketing and distribution resources for ETF providers is to focus on these two areas, ensuring product-environment fit and sharpening franchise brand distinctiveness. This is not an easy endeavor. It requires a high degree of coherence and coordination between the product development, product management, marketing and sales functions. However the payoff from getting this right can be substantial. In the U.S. alone, ETF asset growth was 6% YTD, on a substantial asset base of $1.7 trillion. Also, the ETF industry tends to exhibit winner-take-all characteristics. In the U.S., the five biggest sponsors account for 88% of all ETF assets. Those firms that can execute on this product and marketing strategy have the opportunity to gain assets in this growing space.
Aniket Ullal is the founder of First Bridge Data, an ETF data provider.