The ETF First-Mover Effect

January 19, 2012

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Is the first ETF in a segment always the biggest? I decided it was time for a closer look.

People in the ETF industry often mention the “first-mover” advantage of an ETF: the notion that the first ETF to offer access to a market segment will get an automatic, and potentially insurmountable, boost in assets.

ETFs that come to market later are left fighting for the scraps, so the story goes. Anecdotally this seems to hold water—I’ve run across plenty of cases where the oldest fund in a segment has the most assets, despite the arrival of newer, cheaper funds.

But do the numbers actually tell us if an earlier launch for an ETF really does correlate with higher assets? To find out, I looked at the correlation between two metrics: an ETF’s launch rank and its assets under management (AUM) rank.

Launch rank is simply a fund’s rank in its IndexUniverse-defined segment according to the date it was launched. The oldest fund in a segment—the first mover—gets the highest rank. The AUM is calculated the same way—the fund with the most assets gets the highest ranking.

I looked at 773 ETFs—leaving out inverse and leveraged funds—across 157 market segments. The data include ETFs covering everything from U.S. large-cap equities to corporate bonds to commodities baskets.

The results? First movers very often do end up with the most assets.

First-Mover Effect

When I regressed launch rank against AUM rank, the resulting R2—the so-called coefficient of determination between the two ranks—was 0.81.

A clear way to frame that is that launch rank explains up to 81 percent of an ETF’s rank in its segment. More to the point, in 71 percent of all segments, the first-mover had the most assets.

To me, that was surprising.

Given that ETF issuers compete fiercely on expense ratio, index tracking, and marketing materials to win investors, it’s a little disheartening to learn that so much of an ETF’s success is tied to its launch date.

Of course, there are exceptions to the trend.

Both Vanguard and Schwab have consistently trumped the first-mover effect. For instance, the Vanguard S&P 500 ETF (NYSEArca: VOO) was the 31st U.S. large-cap fund when it launched in 2010, but it now ranks ninth in assets, with $2.5 billion.

So there’s hope that ETFs with low expense ratios and well-chosen indexes can overcome the first-mover effect. But in many cases, the effect is alive and well.


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