The ETF structure itself is financial innovation at its finest, so it’s not surprising that the broader ETF industry is constantly churning out interesting products that break new ground. Innovation is, after all, a lifestyle in ETF land.
State Street Global Advisors and iShares were the firms that originally drove innovation in the ETF space for many years, largely because they were the only significant players in a little-known investment category. But almost 30 years since the launch of the first U.S.-listed ETF, it’s now the small and midsize players that are more frequently bringing innovation to the industry.
ETF Rule Difference
There’s no sign of that slowing down. The ETF Rule has opened the floodgates for new providers, especially issuers of the active persuasion. The ability to use custom baskets on active funds brought a lot of new players—big and small—into the space. One of the largest new players in ETFs is Dimensional Fund Advisors, but plenty of small boutiques that might not otherwise have considered entering the arena have arrived, such as active managers, Adaptive Growth, ASYMmetric, Alger, Euclid Capital and Corbett Road, just in early 2021 alone.
With the low-hanging fruit plucked in the passively managed space (unless you have the expertise to really capture unique themes), active management has been the preferred way for a lot of smaller players to differentiate themselves, many of whom are finally offering ETFs to answer their clients’ requests.
Take 6 Meridian, a tax-conscious wealth manager with $236 million in assets under management that rolled out four funds last year, and one in April. The first four strategies were originally separately managed accounts, making them a perfect fit for the tax advantages of ETFs. The fifth ETF has no corresponding SMA because the firm’s head says the tax advantages of ETFs are simply overwhelming compared to those of an SMA. The ETF Rule’s allowances on custom baskets were a crucial piece of those tax benefits and the decision to enter the space.
Role Of Themes
The rising popularity of thematic investing has afforded new issuers another way to carve a niche in the ETF space. ARK Invest is probably the best known player in theme investing, but there are many firms finding success with laser-focused thematic plays—and it’s certainly not a new trend.
Claymore ETFs rolled out what is now known as the Invesco Solar ETF (TAN) in 2008, where it helped establish the relative newcomer as a strong player in the ETF space. Global X and VanEck also can attribute much of their success to their ability to navigate the thematic space. The blockbuster Global X Lithium ETF (LIT) or the VanEck Vectors Agribusiness ETF (MOO) are examples.
Roundhill Investments is surfing that same thematic wave now, with one-of-a-kind angles on different slices of the market, like eSports, online gambling and streaming services. Defiance, too, is making a name for itself with the first-ever hydrogen fuel ETF, while Simplify rolled out three thematic ETFs targeting disruptive innovation themes at the end of 2020.
And it’s not just the newcomers that rely on themes to build their business. ProShares and Direxion, in looking to diversify away from leveraged and inverse ETFs, have embraced themes, with Direxion hitting a home run when it launched the Direxion Work From Home ETF (WFH) last year. ProShares is behind the unique ProShares Pet Care ETF (PAWZ), the only ETF of its kind and now a $300 million fund.
The entire history of ETFs has been marked by innovation. From broad vanilla, to sectors, to leveraged and inverse, to smart beta and currency-hedging, to active management and thematic ETFs, there seems to be no end to the ingenuity of ETF issuers.