Caution and conservatism pay off for ETFs - Q&A with BetaShares' Alex Vynokur

Chief executive officer and co-founder of exchange traded fund provider BetaShares, Alex Vynokur, has watched the ETF market grow and expand rapidly in the decade since he started up the company - it now has 54 products on the Australian Stock Exchange. He spoke to Industry Moves about what goes into the decision to launch a new product and the company's plans for the future in a Covid 19 environment.

ALEX VYNOKUR

Chief executive officer and co-founder of exchange traded fund provider BetaShares, Alex Vynokur, has watched the ETF market grow and expand rapidly in the decade since he started up the company - it now has 54 products on the Australian Stock Exchange. He spoke to Industry Moves about what goes into the decision to launch a new product and the company's plans for the future in a Covid 19 environment.

What goes into launching a new product?

The process is a lengthy process. It is a process that takes many months and ultimately having done that well over 60 times over the years we are well accustomed to the process and we are continuing to evolve it but it has become an efficient process.

We've now been in business for 10 years - we launched our first products in 2010. When you're a new business you kind of start from scratch [and] there is a fair bit of desktop research and guesswork into making decisions into which product may be popular.

But over time our business has expanded quite significantly and the decisions of which products to launch are now primarily influenced by client demand. We certainly feel that today we are a lot more sophisticated about the needs of investors and the demand than we have ever been before.

What goes into the decision to launch a specific ETF?

The process is really a combination of top down idea generation from our products team as well as the bottom up receiving feedback from customers

We typically assess the products viability, not just from the perspective of will the demand be there for it [but also] whether we are confident that the product will be delivered in a transparent and liquid manner - i.e. making sure funds are true to label and deliver accurately.

We've said no to a lot of products that looked appealing over the years and the reason we do that is we obviously have been building a brand, which for investors stands for something. We are being very cautious and quite conservative in many ways.

What can you tell us about demand for ETFs in Australia?

The one thing we've learnt also over the years is that the Australian market is not a homogenous investor market. We really have three key areas of client demand basically that we typically encounter - one is institutional, then we have advisers [which includes financial planners and stockbrokers] and then of course there is the self-directed market, which includes SMSFs. And the needs of different parts of the market are also quite different.

Financial planners tend to follow strategic asset allocation models and they are looking for broad portfolio building blocks.

What we've learned over time is there are certain products, which have very broad exposure and there are other products that could be more satellite in nature.

What's involved in putting together a PDS?

There is an old term in economics called economies of scale and we definitely enjoy some very good economies of scale - both in terms of in managing a significant pool of client assets ($10 billion) [and] around drafting a PDS and going through the process of listing funds.

How do you decide on service providers?

Those relationships tend to evolve and build over time. Because we've been fairly early in the space we've kind of grown together with our service providers.

The service providers have been evolving [and] the relationships with the service providers tend to be quite long term and tend to be close because we are going through this together.

It's quite a specialist set of skills that is required of our service providers to be able to support ETFs. The tolerance for deviations or for errors is basically non-existent in our world. We are in the business of minimising tracking error and that is absolutely critical.

We still have many of the same service providers [as we had at the beginning]. We've added a few to our panel. We are obviously, as a fiduciary and as a responsible entity, required to act in the best interests of our client ...and partly that is to ensure our clients are getting the best value for money.

How do you expect marketing strategies to change as a result of Covid19?

We certainly have been making significant use of digital communication over the years and we have been learning and becoming more efficient at it and our clients have, quite importantly, been getting used to using electronic means.

There is probably still no substitute for human interaction but at the same time tech, even prior to Covid, has been taking a much greater role. The one really nice thing about electronic communications is that you actually get much better feedback of the effectiveness of your communication.

The days of when the marketing team decided there would be a big bang function for every product are probably over.

What are your plans for the future?

We are open for business and continue to invest in the growth of the business. I think ETFs have probably grown in relevance with this volatility.

We are working on a number of products that we will be launching probably before the end of this financial year.