ETF Capital Markets Desk: Assets Under Management

    David Mann

    David MannHead of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments

    In the last edition of Capital Markets Corner, our head of capital markets, global ETFs, David Mann, discussed the misconceptions of using trading volume as a gauge for the liquidity of an exchange-traded fund (ETF). Here, he dives into another aspect investors consider when exploring ETFs: Assets Under Management (AUM).

    Certainly as a fan of the Golden State Warriors basketball team (did we really sign Kevin Durant!?!), I have a soft spot for “Strength in Numbers.” However, when it comes to investing in an Exchange-Traded Fund (ETF), I find it hard to fathom that an investor’s ultimate decision would be driven by the fact that lots of other people are invested in a particular ETF.

    If the desire for a high-AUM product is driven by perceived liquidity benefits, then I recommend you read my previous post, “What Investors Look For in an ETF: Liquidity.

    To me, the AUM-ETF discussion comes down to a single factor: the concern about being a material investor in the fund. An investor looking to put $15 million into an ETF with an AUM of $5 million will represent 75% of the fund. Is that a cause for concern?

    Certain investment funds may be subject to restrictions on investments in ETF under the Investment Company Act of 1940. Separately, many other investors have investment guidelines that set limits for their percentage of ownership in all kinds of securities. By their own admission, many of these guidelines were not put in place with an ETF in mind. We have found widespread agreement that the ETF is just a wrapper of the underlying securities, and yet many mandates are slow to adjust.

    I keep coming back to how an ETF is created. Before the first day of trading, typically there is one firm (the seeding counterparty) that delivers the underlying basket to the ETF issuer in exchange for the first ETF shares. This seeding counterparty is often 100% of the fund. If those seeding firms are comfortable owning such a limit, then, in our view, there is no reason any investor should have concerns about the viability of an ETF based on its AUM.

    What’s more important is to determine how the ETF fits in terms of asset allocation of an investor’s broader portfolio. If an ETF is providing the type of exposure an investor is seeking, he/she should be less concerned about the relative percentage of that ETF’s AUM they account for than with whether the ETF investment is the optimal percentage of their portfolio, given their investment goals.

    David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
    This information is intended for US residents only.

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