While the core/satellite strategy has been useful in the past for growing ETFs, the time has come to change the way ETFs are marketed, says a new study from Financial Research Corp. (FRC). Increasingly sophisticated investors with diverse needs and a demand for downside protection mean that one-size-fits-all marketing is no longer adequate.
The study, "ETF Trends: Insider Insights on Distribution, Portfolio Construction, Risk & Regulation," shows that some firms are working harder to define their target audience, while others are focusing on the client and behavioral characteristics.
Bob Jenkins, president of FRC, said in a statement, "In our interviews with industry leaders, we learned 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. 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."
Jenkins went on to say that the study showed that the wide variety of markets and the strategies used to reach them were due to two factors: "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."
Channel alone—whether wirehouse or direct to consumer—cannot adequately capture investor sophistication, he continued. But while there is room for optimism, there is also a need for caution.
"As we analyzed the approaches of firms in the industry regarding investment situations and channels," said Jenkins, "we have come to believe that there is room for all types of thinking, from traditional to groundbreaking. However, with the likelihood of more competitors in the fray, success in the future will rely upon strategic vision combined with well-conceived and comprehensive marketing processes. As the industry matures, poor marketing execution can doom otherwise visionary product and distribution concepts."