In Praise Of The Little Guy

September 01, 2017

[This article appears in our September 2017 issue of ETF Report.]

As I paged through this month’s articles, I kept thinking the same thing: I’m not sure I’d have the intestinal fortitude to be an upstart ETF issuer right now.

It’s hard to think of ETFs as a maturing industry when the growth curve in assets looks ever-more like a hockey stick, but the fact is, ETFs are a mature space. The first products are over 20 years old, and there hasn’t been a significant, successful innovation in ETF product design since the launch of the SPDR Gold Shares (GLD) back in 2004. Like most maturing industries, growth often accrues to the entrenched players with established brands.

The Role Of Upstarts
But with this maturation comes the classic innovator’s dilemma: As firms get bigger, any innovation will naturally disrupt their incumbent businesses, leaving potentially explosive niche markets to upstarts who are willing to take risks, tackle new markets, and upend the status quo.

If you look at the raft of recent product launches, it’s exciting to see firms carving out those innovative niches. Take a firm like Cambria, which launched its Core Equity ETF (CCOR) earlier this year, an actively managed U.S. equity fund that uses an options overlay for risk management. The $100 million it garnered in just two months may not be on the radar for a firm like BlackRock, but it represents the tip of the spear on interesting—and often actively managed—products that are chipping away at the foundations of some of the giants.

Or consider ACSI, an upstart ETF from ACSI Funds that invests in firms based on customer satisfaction surveys, or the ProSports Sponsors ETF (FANZ), which holds companies that partner with major league sports. I’m not endorsing these funds—I have absolutely no idea whether chasing pro-sports sponsors is a sound investment philosophy—but the fact is, most of the interesting innovations that roll across my email box every week are coming from the little guys.

New Flavors Of Vanilla
It’s not just new investment themes either.  Little guys are taking on “vanilla” exposure in new ways, hoping to take a bite out of the big guys by competing on cost and structural issues baked into old-guard products.  Take GraniteShares for instance: It’s tackling the giant iShares S&P GSCI ETF (GSG) with a me-too product offering at less than half the cost (the GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG), and a structure that solves a thorny tax issue for commodity investors.

I’d cite another dozen examples, but I’d run out of space. The point is this: Innovation in the ETF industry is alive and well, and increasingly, it’s the little guys who’re putting the big guys on notice. The competition to provide better value for investors, whether it’s through cost, structure or exposures, is as fierce as it’s ever been. The big guys will react, of course, and interesting new products launch from their R&D shops every few months—and costs only go one way.

But the little guys will continue to have a freedom the entrenched players can only imagine, and that’s exciting.  To paraphrase Steve Martin: They can try and lock them up, but they’ll just walk right out between the bars.

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