The Biggest ETF Firm You May Not Have Heard Of

May 01, 2017

Mike AkinsMike Akins

SVP, Head of ETFs

ALPS

 

 

 

 

 

[Editor's note: In our May ETF Report, "Behind The Curtain," we profile four firms, which you may or may not have heard of, that have deep roots in the industry, sometimes through multiple business lines. These are the lawyers, the index providers, the custodians, the liquidity providers and the market makers that keep the gears of the ETF industry spinning. See "The Guiding-Hand Firm For ETF Issuers," "Dechert Paves Way For Improved Regulations," "Doing The Heavy Lifting For A Fee."]

In the ETF world, you have your bit players and your big guns; namely, BlackRock, Vanguard and State Street.

Then there’s ALPS.

Since jumping into the ETF business in 1995, ALPS has steadily grown to become the 11th-largest ETF issuer and fourth-largest third-party distributor on the market.

Yet Jeremy Held still likes to think of ALPS as an underdog.

“In an industry dominated by scale players, ALPS is probably the most significant player that people haven’t heard of,” said Held, the firm’s SVP and director of research.

Today ALPS is a one-stop shop for would-be ETF providers, rolling advisory, subadvisory, distribution and marketing services into a single brand. The company also offers a small but robust lineup of house-brand ETFs.

“There aren’t many firms that do what ALPS does,” Held added.

The Name Behind The Biggest Names
ALPS started more than 30 years ago as purely a fund servicing shop, handling back-end administration, compliance and fund management for its mutual fund clients. That’s still a service it offers, though it’s since branched out to closed-end funds, hedge funds and, of course, ETFs.

In the years since, ALPS has added two more legs to its stool: third-party marketing/distribution, and asset management.

“We now go nuts-to-bolts across the entire ETF platform, from research and index development to portfolio management and supporting our strategies in the field,” said Mike Akins, SVP and head of exchange-traded funds.

ALPS takes care of the marketing and distribution for some of the biggest ETFs today, including State Street’s Select Sector SPDR ETFs, which together total some $125 billion in assets under management. ALPS also serves as distributor for ETFs by Invesco PowerShares, WisdomTree and U.S. Commodities Funds, among many others.

These distribution relationships helped ALPS identify how the ETF landscape was shifting, says Held: “We were uniquely poised to see how ETFs were becoming a real force.”

In 2007, the company launched its first self-branded ETFs. In the decade since, ALPS-brand ETFs have accrued roughly $14 billion in assets under management.

The Secret Sauce: Differentiation
Yet ALPS’ asset management business remains fairly focused: Only 16 ETFs carry the ALPS name—a conscious choice, says Held, to help the firm better compete with the Vanguards and BlackRocks of the world.

“To stand out, you really have to provide a differentiated product,” he noted. “You can’t just throw 100 funds against the wall and hope something sticks.”

Akins agrees: “There aren’t too many examples of me-too products finding success in the marketplace. We always look to be different, or first-to-market. Our most successful products fit both categories.”

As an example, he points to the $10.8 billion Alerian MLP ETF (AMLP). Not only was AMLP the first ETF to focus on master limited partnerships, thus giving ALPS first-mover advantage in the space, but the fund also offered a unique take on energy exposure, which had long been dominated by futures-based indexes.

“MLPs aren’t in the S&P 500 Index, by rule. So when you buy an MLP, you’re buying something additive to the portfolio, not repeating exposure from your broad-based products,” explained Akins. 

 

ALPS’ other success stories include their “Dogs of the Dow” series of factor-based ETFs, the most popular of which is the $2.2 billion ALPS Sector Dividend Dogs ETF (SDOG). SDOG equally weights the five highest-yielding S&P 500 companies in each sector.

“SDOG wasn’t first to market, not even close,” said Held. “But it was successful because it was so different than every other dividend product that existed at the time.”

ALPS also runs a handful of thematic strategies, such as the ALPS Medical Breakthroughs ETF (SBIO), which focuses on U.S. biotech small-caps with drugs in late stages of clinical trial. SBIO has only one company in common with the S&P 500, Akins notes.

“I love the niche ETF products out there, but generally the products that make sense will find niches that are still very large in market capitalization, have plenty of names and have plenty of liquidity available,” he added. “When you try to parse the market too small, the ETF structure doesn’t work as efficiently.”

Managing The Managers
Akins says ALPS often fields calls from active managers looking to package their strategies into an ETF, or from index managers curious about the best way to replicate a pet project index.

“I’d say 75-80% of our strategies still come from partnerships, where we license somebody else’s IP,” he said. “We consider ourselves a manager of managers—a partnership firm.”

To that end, ALPS maintains vast operational infrastructure, including an existing trust and board of trustees that it can use to bring down costs, scale up distribution and speed up launch times for new funds. It guides newcomers through the nitty-gritty of compliance checks and due diligence reviews, and walks them through how to evaluate liquidity, capacity and market competition. ALPS even offers a robust marketing platform that reviews some 14,000 advertising pieces per year.

“It’s not a cheap process to get your exemptive relief or set up trading operations,” said Akins. “Then you have to worry about the operational nuts and bolts of managing corporate actions, staying tax efficient, maintaining a capital markets team and so forth. But we have the experience and the infrastructure to help new ideas get off the ground.”

ALPS also maintains a group that works directly with RIAs to analyze their models relative to ALPS’ ETFs. “It’s all about helping the RIA understand how and why they’d use our products in their allocations,” he added.

“It’s simple, but that’s the key to a successful ETF strategy,” noted Akins. “The end investor has to understand how you fit into their portfolio.”

 

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