Spotlighting The Smaller Players

May 01, 2020

As the ETF.com Awards ring in their seventh year, the world and its financial markets are in a state of flux, largely due to the global spread of the coronavirus. But the U.S. ETF industry has endured largely unscathed, with the products performing as promised.

This year, the winners list highlights the breadth of the industry—the top three players (iShares, State Street Global Advisors and Vanguard) only make fleeting appearances. Smaller issuers and newcomers, on the other hand, play prominent roles. This is a testament to the maturing of the U.S. ETF industry and the diversity of choices, issuers and investors.

Vanguard and iShares, respectively, took the ETF of the Year and Best New ETF prizes, but most of the other issuer- and ETF-related awards went to midtier issuers or smaller. That said, the vast majority of assets are flowing into funds issued by the top three issuers, but ETF investor choice goes beyond the Big Three.

Unusual Themes
ETFs are low-cost vehicles for beta exposure, but another less-talked-about benefit of ETFs is that they can often deliver exposure to little-known or hard-to-access areas of the market at a reasonable price. And that particular benefit is really the province of smaller issuers. The democratization of investing is at your fingertips.

For example, cloud computing ETFs have been around for several years, and the First Trust Cloud Computing ETF (SKYY) was the first to make its debut. Since then, SKYY has grown to become a $2 billion fund and has been joined by two other cloud computing ETFs, the Global X Cloud Computing ETF (CLOU) and the WisdomTree Cloud Computing Fund (WCLD). Despite cloud computing being an important part of the current technology landscape, iShares, State Street and Vanguard haven’t yet added such a product to their lineups.

Similarly, when ETF Managers Group launched the ETFMG Prime Cyber Security ETF (HACK) in 2014, the fund was an instant hit that put the small issuer in the spotlight. A similar ETF from First Trust followed in 2015, and eventually iShares launched a competing fund as well. However, that was in June 2019—five years later.

Complicated Strategies
ETFs are also frequently mentioned as great ways to gain exposure to more complicated and targeted strategies.

Consider the $95 million Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL), winner of the Best New U.S. Fixed Income ETF award. The fund hedges against inflation and yield curve shifts. It’s recently outperformed ETFs representing core asset classes such as the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total Bond Market ETF (BND).

IVOL’s strategy is rather complex and entirely unique—and none of the Big Three offers anything remotely comparable.

Sure, the top tier of issuers offer all the core exposures you may need. And they’re really good at providing cost-effective access to crucial spaces. That said, the smaller issuers offer some very useful and more specialized tools that are often overlooked.

Don’t Forget The Little Guys
You can’t really call established firms like First Trust or WisdomTree the underdogs, but they’re dwarfed by issuers like iShares and Vanguard, which have well over $1 trillion in ETF assets under management apiece. And then there’s the fact that there are currently a lot of even smaller issuers—nearly 150—with AUM below $5 billion, as opposed to the 19 issuers that land above that threshold. That’s a lot of “little guys.”

It’s very clear that issuers ranking below the top tier in the ETF industry are a disruptive force in the space. As our winners lineup for 2019 suggests, they should not be overlooked.

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