ETF Boutique Acquisition Reflects Growing Demand

With plans for a new exchange-traded fund platform branded under New York Life’s MainStay Investments business, one investment solutions provider says it’s time to double down on ETF offerings.

IndexIQ is by no means the only investment strategy firm hoping retirement plan sponsors and advisers will grow more comfortable with the use and promotion of exchange-traded funds (ETFs) among retirement plan participants—but it is putting its money where its mouth is, says CEO Adam Patti, and has done so since its launching its first ETF in 2009.

The firm recently reached a definitive agreement with New York Life Investment Management through which IndexIQ will rebrand its services as MainStayIQ, gaining the scalability and support of the $101 billion MainStay Investments organization. The end vision of both firms is a robust MainStay ETF platform, Patti notes, but that step is still some ways off: “Step one is to close the deal.” He says the transaction remains on track and is expected to close in the first half of 2015.

Patti says New York Life’s MainStay Investments business will leverage the acquisition of IndexIQ to enter the ETF market “with dominant position in alternative ETFs,” adding that the move is New York Life’s first entry into the ETF industry. Judging from this deal and other factors, such as a wealth of investment industry research showing continued strong growth in ETF assets, Patti feels 2015 will be a big year for ETFs, especially those offering exposure to alternative investments.

“Many solutions in this space are just reaching the point of having the 5-year track record that is so important from the plan sponsor performance evaluation perspective,” Patti observes. “What gets us excited is being able to present the 5- and 6-year track records for our liquid alternative strategies. In our case, the performance has consistently been strong and we are taking this message out into the marketplace.”

Patti also anticipates a favorable reaction from both plan sponsors and advisers once they see New York Life branding on a liquid alternative ETF. “As you see these solutions starting to be offered under an iconic and trusted brand like New York Life, that’s an indicator about where the investment markets are moving on ETFs.”

The movement towards mainstream continues for traditional and alternative strategy ETFs, he adds, and the retirement markets are slowly taking note. “It’s always been something of a struggle, as a small firm, to prove to people that we have staying power, and that we’re in it for the long term,” Patti explains. “My answer here is just to say, look at the amount of due diligence New York Life is putting us through, and you can be confident we’re a solid company.”

The same would probably go for other boutique ETF companies forming alliances with big brand providers, he predicts. “The bottom line is that having the New York Life brand on these ETF solutions will be impactful.”

Another favorable result for IndexIQ of the acquisition by New York Life, Patti says, is the firm’s robust marketing and outreach capabilities.

“Hooking up with the distribution power of MainStay Investments is a big opportunity for us, as a boutique ETF provider,” Patti says. “Looking at their 200+ sales and marketing folks, we are seeing a lot of opportunity to really scale up what we currently do.”

Patti says part of establishing the new MainStay ETF platform will be “continuing the expansion of our solution set to allow advisers to find new ways to construct effective portfolios for retirement savers.”

In this sense, Patti feels defined contribution (DC) plan sponsors and advisers can take a page from their pension plan counterparts. Alternative investments have been important for large pension funds and other big institutional investors for many years, he notes, but now it’s trickling down to retail investors and individual DC plan participants, along with a willingness to try new investment products like ETFs.

Other industry experts suggest a competitive retirement plan services market is pushing advisers and plan consultants into new territory, and could lead to greater adoption of exchange-traded funds in DC plans.

“Our simple message for plan sponsors is that, given their fiduciary duty to ensure reasonably priced investment portfolios, ETFs absolutely should be a part of their retirement solutions,” he concludes. “At this point many retirement programs are still waiting for the leaders to show what is possible with ETFs. The typical sponsor may have heard of ETFs, but they don’t have them on their plan menu just yet. We hope this will change.”