New Fund Targets ETF Industry

April 20, 2017

Today, Exchange Traded Concepts brought to market the somewhat self-referential ETF Industry & Financial Services ETF (TETF). The fund targets publicly traded companies that are involved in the management, servicing, trading or sale of ETFs, the prospectus said.

The fund comes with an expense ratio of 0.64% and is listed on the NYSE Arca. It tracks the Toroso ETF Industry Index.

Given that assets invested in ETFs are heading at a steady pace toward $3 trillion, an ETF targeting its own industry isn’t as far-fetched as it would have been, say, five years ago. The number of issuers since that, according a press release from Toroso Investments, has jumped from 45 to 78 during that time, while assets under management have more than doubled from $1.2 trillion.

“Not only are we seeking to capture the performance of the industry, but we’re also looking to bring together many of its leaders to leverage their authority as we monitor, research, and benchmark the category’s potential future growth,” said Toroso Investments CEO Guillermo Trias.

According to Toroso CIO Mike Venuto, the impetus for the index underlying TETF had its origins in his firm’s efforts at “illuminating what goes on in the ETF space.” 

“It’s been very difficult for people to invest into the ETF industry itself and into that growth, which has been around 20% a year,” he added.

 

A Wide-Reaching Index

TETF doesn’t cover just issuers like BlackRock, owner of the iShares brand,  or WisdomTree. It has a wide reach, according to its prospectus, covering ETF sponsors; asset managers; index providers; broker-dealers; securities exchanges; and service providers, such as custodians, transfer agents, and administrators.

Companies in the index must have a market capitalization of at least $200 million and meet liquidity requirements. Currently, the index has 37 components.

“The ETF industry is more than just a list of fund sponsors, and this index is designed to include the full range of participants,” said Venuto, who describes the ETF industry as more of an ecosystem than just a standard industry.

“It is also aimed toward capturing not only the established leaders in each area, but also those firms that might be new to the space but which are bringing exciting approaches that could resonate with investors and drive further growth of the industry itself,” he added.

The index relies on a committee of index experts that include Trias and Venuto, but also longtime ETF industry stalwarts Linda Zhang, the founder of Purview Investments; Kris Monaco, founder of Level ETF Ventures; and Kevin Carter, founder of Big Tree Capital.

“We’re looking at all the companies that are connected in any way to the ETF industry, and then we’re sitting down and systematically evaluating them,” Venuto said of the committee.

 

Tiered Methodology

The methodology divides the universe into four tiers that receive different weights, with the components in each tier equally weighted. Tier 1 is weighted at 50% and mainly covers companies that advise or sponsor ETFs or companies that have substantial activities in the ETF space that represent a direct financial impact to shareholders. It currently includes BlackRock, Charles Schwab, Invesco, State Street, WisdomTree among its members.

Tier 2 is weighted at 25% and covers companies that have substantial ETF-related activities but shareholders see only an indirect financial impact from those activities. It includes firms such as KCG Holdings and Nasdaq.

Tier 3, weighted at 15% of the index, involves companies with moderate participation in ETF-related activities. The prospectus notes that such companies are mainly involved in support services and tend not to advise or sponsor ETFs. Current components include the liked of Bank of New York Mellon and US Bancorp.

Tier 4 is weighted at 10% and targets companies that are new or for which participation in the ETF industry is a smaller part of the firm’s overall activities, such as Morningstar and Eaton Vance.

The fund’s launch brings ETF.com’s list of ETFs in striking distance of 2,000 funds with a total count of 1,999 ETFs currently trading on U.S. exchanges.

 

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