Vident Investment Advisory (VIA) engages in sub-advisory services for asset managers across a variety of asset classes and product structures. For those that are unfamiliar, what is the role of a sub-advisor in the ETF ecosystem?

An ETF sub-advisor is an entity to whom portfolio management responsibilities are delegated by the ETF sponsor. This can cover both passive and active strategies.

Where the strategy is index-based, the sub-advisor makes all portfolio management decisions, with a focus on minimizing tracking error and portfolio trading costs.

For an active strategy, the ETF sponsor makes security selection decisions while deferring trading decisions to the sub-advisor.

The best time for a sponsor to start working with a sub-advisor is as early as possible. We have seen firsthand the important role a sub-advisor can play through the product development and launch process, well before any trading starts to take place. The pre-launch process is essential for the smooth introduction and functioning of any new fund, and an experienced sub-advisor knows where the pitfalls can be found and avoided and can work with all of the other partners involved to make the launch as successful as possible.

Post-launch, a good sub-advisor will work closely with the ETF sponsor to ensure that the fund trades well with reasonable spreads and will be supportive if changes need to be made, such as a transition to a new index.

A sub-advisor is also a gateway to building important relationships, providing introductions to the other critical players in the ETF ecosystem that are required to operate the fund – for example, administrators, custodians, legal, compliance, exchanges, and capital markets relationships. Put simply, a good sub-advisor is part guide, part concierge, and all partner.

What special considerations should an asset manager consider when evaluating a sub-advisory partner?

At VIA, we often talk about our primary goal in supporting our clients, which is to ensure that they can maintain as much of their investment insight as possible while operating within the regulatory and market structure constraints of ETFs. We share our advice and best practices from launching over 50 ETFs throughout our firm’s history. We have seen almost every scenario that an ETF sponsor would be likely to face and have a plan to address challenges as early as possible to avoid delaying the launch process.

From my perspective, there are a number of differences across ETF sub-advisors, including the ability to minimize tracking error and portfolio trading costs, having deep capital markets relationships to support a successful launch and maintain tight spreads, and being able to support the unique trading strategy of active managers and providing as much tax optimization as possible.

Active ETFs are coming off another record-breaking quarter. Based on your role and client conversations, what do you think needs to happen for active ETFs to continue to grow?

I believe growth will be slow but steady, as more investors of all stripes continue to get educated and comfortable with active ETFs. However, the interest cannot be denied. Most of my clients – both current and new – want to primarily discuss their strategies in all flavors of active: transparent, semi-transparent, and non-transparent. While the excitement is palpable on part of the ETF sponsors, it will take a little longer for us to know for certain that the enthusiasm is being reciprocated by users of ETFs, but the trends of the past several months certainly seem positive.

VIA has been supportive of clients seeking to launch actively managed ETFs. What guidance would you provide sponsors as they consider expanding their product offerings to include actively managed ETFs (either fully transparent or semi-transparent)?

I am very supportive of non- and semi-transparent structures as part of the ETF sponsor’s arsenal of tools. To me, this evolution of active ETFs has further democratized investing by allowing mutual fund, SMA, and private fund managers, who may not have been comfortable going down the ETF route before, to consider launching strategies that were not previously available to financial advisors and individual investors.

I believe that semi- and non-transparent active structures have specific use cases, and it is generally clear to my colleagues and me where it makes sense for a sponsor to consider utilizing this approach. We spend a great deal of time working with our clients to understand the pros and cons of utilizing an approach besides the transparent active approach. Since we want what is best for our clients, we are not afraid to have the honest conversations and to help them determine the best approach for their specific strategies.

As part of the unique position we occupy in the ETF ecosystem, we are fortunate to have great relationships with the sponsors of such structures, particularly NYSE. We believe the NYSE Actively Managed Solution offers optionality and flexibility that active managers may need as they seek to launch their strategies in an ETF format. We look forward to deepening that relationship and helping to bring additional exciting new funds to market.