What makes an ETF worth investing in? And should the industry be asking that question long before a product reaches the market?
David Oberholzer, Managing Director at EasyETFs, challenges the traditional approach to ETF product development and distribution. He makes the case for putting investors at the centre of the process, rather than creating products and hoping demand will follow.
The debate around South Africa’s active ETF market, and the broader investment product universe, has focused on distribution as a key constraint. In my view, the debate needs to move earlier in the process. The industry needs to look inward and address distribution and intent during the structuring phase, ensuring that each product is designed with a clearly defined use case, target investor and distribution strategy from the outset.
Before any new product is brought to market, three questions should have clear, defensible answers: who needs it, what role will it play in their portfolio, and why would they choose it over existing alternatives? Those answers should shape the product, its investment proposition and its route to the investor.
We need to define the destination and design the journey to reach it.
The finance industry, and the products we build, do not exist in isolation. History offers useful lessons.
Concorde was a technological marvel, but its high costs and restricted routes limited its commercial opportunity. Betamax offered excellent picture quality, yet lost out to VHS amid differences in recording time, manufacturer support and market adoption. New Coke had Coca-Cola’s brand and distribution behind it, and a formula that performed well in taste tests. Yet Coke underestimated what customers valued about the original. Reach alone could not secure the acceptance it expected.
The learning: not all great products receive sustained market support. Understanding what customers value, and the circumstances in which they will adopt a product, is part of the design challenge. For ETF issuers, this means challenging the proposition with our investment managers before launch. We need to establish the value of the proposed product and test the assumptions behind its intended demand.
The same discipline applies when developing ETFs as a growth vertical for asset managers. A listed format needs a considered purpose. Where it provides exposure to an existing fund, investors are entitled to ask why they should choose it over the original unit trust.
The answer may lie in easier access, a more suitable investment minimum or better overall economics. The benefits need to be meaningful for the intended investor, and the strategy deliberate. Sometimes that requires uncomfortable conversations and a willingness to redefine the product before bringing it to market.
When I think about ETFs and listed products, I think about democratised access to investment opportunities that were once available mainly through institutional channels or specialist advisers. That shift should encourage us to look beyond the traditional ways investment products have been developed, distributed and sold.
Independent financial advisers and wealth managers remain important routes to retail investors. But retail begins with the individual investor. The broader availability of listed instruments gives managers an opportunity to develop relationships with those investors directly, alongside their engagement with advisers.
Technology enables communication and engagement with individual investors at scale. Investment platforms provide access, while digital communication and AI tools can help investors find and understand product information, investment philosophies and the manager’s secret sauce.
The onus rests on us, as issuers and investment managers, to make reliable, accurate and current information available through the channels that investors use. Investors should be able to understand a product’s purpose, costs, risks and behaviour without having to jump through hoops to find the information. Simplistically, the information should be served to investors where they already are.
This is where attention becomes relevant to distribution. A product needs to be discoverable, its proposition understandable and its route to investment practical. These are all aspects of a products requirements that can, and should, be designed for before launch.
Attention drives interest, but interest alone does not create lasting demand. Investors need a clear reason to own the product, confidence in its role within their portfolio and the information required to make an informed decision. That confidence must then be reinforced through performance appropriate to the mandate, sound risk management and consistent communication.
“List it, and they will come” cannot be the strategy.
Start with the investor need, build the product and its route to market around it, and choose partners who can support the full journey - from first understanding to the final destination.
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