Assets in exchange-traded funds surpassed $3.4 trillion last year, up nearly five-fold over a 10-year period. With the ETF market still growing exponentially, ETFs have
become an increasingly popular tool for institutional investors
transitioning portfolios from one investment manager to another.
Chief Investment Officer recently spoke with Filip Skala, CFA,
Managing Director and Head of BTIG Transition Management,
and Thomas Smykowski, Managing Director and Head of BTIG
Global Portfolio and ETF Trading, to find out what ETFs offer
CIO: How has the growth in ETFs made them a more
attractive transition management tool?
Thomas Smykowski: ETFs are a scale business, and as they’ve
grown their pricing has become more competitive. When an
investor is transitioning to a new manager but wants to maintain
exposure to the market in the interim, the cost advantage of
integrating ETFs into your strategy is difficult to beat. Rather
than buying all the components of an index in the cash market or
turning to derivatives, institutional investors can buy an E TF. They
then receive professional management for a relatively low fee and
can invest for the short term or over a longer period.
CIO: Hasn’t that been the case for some time now—at
least for anyone looking for exposure to a broad index
like the S&P 500?
Filip Skala: What’s new is that there are now so many options
among ETFs that it's easy to create the desired exposure given
the asset owner’s investment strategy. If they want exposure to a
niche market, they can achieve it through individual ETFs, or we
can assemble a customized basket of ETFs. This is true not only
for equities, but for fixed income, real estate and commodities
strategies as well.
CIO: What about liquidity, especially for those niche-
market ETFs? Can large asset owners move in and out of
them without impacting their price?
Skala: It’s a much more liquid market than you might imagine.
While some ETFs are not very liquid in the secondary market,
many are made up of constituent components which are very
liquid. A specialized ETF trading desk like ours will have the
capabilities to execute a significant volume of ETF trades on a
creation/redemption basis, meaning it will buy the underlying
securities of the ETF and deliver them to the ETF provider in
exchange for units of the ETF. In our case, even if an ETF is not
very liquid in the secondary market, we can seamlessly execute
sizable trades in one day—maybe several times the typical daily
volume for that ETF.
CIO: Beyond low management fees, what other benefits
do ETFs offer during manager transitions compared to,
say, buying futures contracts on stock or bond indexes?
Skala: We already hinted at the first benefit. You can gain more
exposure to a particular sector, or even a factor, through E TFs than
you can through broad index futures. In addition, ETFs provide
transparency of holdings and offer insight into client exposure
within an asset class. Finally, unlike with futures, you don’t have
to worry about rolling them forward and incurring costs if you’re
trying to maintain exposure over a longer period of time.
CIO: As an experienced transition management
provider, is there anything you’re offering clients that
wasn’t available to them in the past?
Smykowski: We’re proud of the breadth and transparency of our
offering, but perhaps its most unique component is the proprietary
system we use in rebalancing ETFs to stay aligned with their
respective indices. The system monitors transactions and advises
clients on which securities are likely to be trading at heightened
volumes. As a result, clients may be able to take advantage of
these projections when implementing their transition strategy.
Let’s say we have a transition client selling a small-cap portfolio.
We can identify the names in the portfolio which will be part of an
upcoming rebalancing, and gauge whether the names will trade
in the same or opposite direction. If it's in the same direction,
we might trade the names before the rebalancing so we don’t
expose the client to additional impact. Conversely, for names
that will trade in the opposite direction, we might find crossing
opportunities between transition clients and our rebalancing
order flow. Such crossing opportunities can minimize spread and
impact for clients.n
A Bigger Chunk
Of the Transition
Thomas Smykowski Filip Skala, CFA