Core/Satellite Strategy a Good Start in ETF Investing

ETF Trends: Insider Insights on Distribution, Portfolio Construction, Risk & Regulation, published by FRC, found that the core/satellite approach has proven to be an effective way to introduce investors to ETFs. “One important finding from our research, however, was that the terms “core” and “satellite” had different meanings to different people,” said Bob Jenkins, President of FRC. “ETFs and mutual funds are now used in both core and satellite, and so are active and passive strategies. RIAs are also blending strategic and tactical approaches, due to client demand for downside protection.”   

The report is based on interviews FRC conducted with top executives from firms representing over 90% of ETF assets under management in the U.S. According to FRC’s analysis, in 2010 ETFs had captured more than 11% of all marketable securities that were not in money market mutual funds. FRC projects that the ETF assets will nearly triple between year-end 2010 and 2016.   

Interviews with industry leaders revealed that there are a variety of areas that firms are targeting for growth, and the firms are employing a diverse set of marketing approaches to drive market expansion. “The multiplicity of markets that are considered as opportunities and approaches to reach those markets, in our analysis, result from two major factors,” said Jenkins. “The market is relatively young, and firms see many options for market expansion, in terms of investor types, situations and goals, as well as distribution channels. The potential use of ETFs in retirement plans is an example… this opportunity is frequently viewed with optimism, but not always.”   

Some firms are focusing on being able to more precisely define their target audiences. “Asset management firms traditionally use distribution channels, such as wirehouses or direct to consumer, as the basis for market segmentation. We know, however, that channel alone does not do a good job of capturing investor sophistication, and some competitors are studying the behavior of the end-client and incorporating behavioral characteristics into their product approaches, communication efforts and tool development,” said Jenkins.