Why is There So Much Side-by-Side Management in the ETF Industry?

Abstract

As of 2018, around 60% of ETF managers also manage mutual funds, particularly active mutual funds, in a ``side-by-side'' arrangement (SbS). Mutual fund managers with institutional clients and subject to strong ETF competition are most likely to adopt such dual roles. SbS initiations lead to institutional mutual fund outflows and contemporaneous ETF inflows. These results are driven by the rebalancing behavior of institutional ``relationship’’ clients. SbS ETFs charge an expense premium, are differentiated, and generate stronger ETF growth for firms. This allows firms to leverage manager-client loyalty to respond to ETF competition and expand the firm’s product portfolio with ETFs.

Keywords: ETF managers, mutual fund managers, side-by-side management, flows

JEL Classification: G23