ETF Shakeup: PureFunds Brand Name Ousted

July 31, 2017

After the close of business on Friday, ETF Managers Group (ETFMG) made a rather stunning move when it announced in a press release that the family of PureFunds ETFs would be rebranded with the ETFMG name as of Aug. 1. The move was also documented in a filing to that effect that hit the SEC Edgar database the same day.

Furthermore, the three funds tracking indexes from the International Stock Exchange (ISE) will track benchmarks provided by Prime Indexes, which was co-founded by Kris Monaco, formerly head of ISE’s ETF Ventures operations who is now a managing partner with Level ETF Ventures. The ISE is currently owned by Nasdaq. Included in the sweeping changes is the well-known $1.2 billion PureFunds ISE Cyber Security ETF (HACK), PureFunds’ flagship product.

The move is neither an amicable parting of ways nor business as usual. PureFunds Founder and CEO Andrew Chanin confirmed that the PureFunds brand had not been sold and noted in the following statement that a lawsuit has been filed:

“ETF Managers Group, LLC and ETF Managers Trust terminated Nasdaq and PureFunds interest in the “PureFunds ETFs.” PureFunds has filed suit against ETF Managers Group, LLC, the ETF Managers Trust and their principals, including Samuel Masucci and Barney Karol, Esq. before the Superior Court of New Jersey, Union County to address the termination.”

Christian Magoon, CEO of Magoon Capital and Amplify ETFs, is taken aback by ETFMG’s move. He has a consulting contract with the ISE to assist with HACK’s sales and marketing in addition to serving as the fund’s media spokesperson.

“This is the first white-label provider I’ve aware of that has terminated the firms who developed the investment idea, index and had economically supported the products in question. This should give serious caution to any firm considering a partnership with a white-label provider as reputation is key,” Magoon said. 

“While this termination is being disputed, Friday’s news stands as a great loss to Nasdaq and PureFunds as it stands today. The outcome of this disputed termination will likely be decided by the court case already underway,” he added.

ETFMG Weighs In
ETFMG Founder and CEO Sam Masucci says that PureFunds’ relationship to the funds bearing its name is purely a marketing one. ETFMG is the issuer of all of the PureFunds ETFs.

“We have terminated the marketing relationship we had with PureFunds. They violated certain agreements that we had, and it forced us to terminate the arrangement. They don’t have any operating role in the fund—they never have, he explained. “They had a marketing role, and the funds are issued by the trust. The trustees along with the advisor decided that after multiple violations or issues with the partnership that we had no choice but to terminate them.”

Masucci declined to characterize the exact nature of the agreement violations.

“We had a service agreement with them where they were going to provide some marketing, and they did. They had to meet certain obligations that were in our agreement, and they failed to do that,” he added. “After several attempts to get them to try and live within the bounds of the agreement and their continued refusal to do that, we had no choice.”

Although Chanin has been the public face of the PureFunds ETFs, Masucci says he played no role in the development of the funds and was involved in solely a marketing capacity.

“All of the PureFunds and the indexes were created by ISE Ventures, which was headed by Kris Monaco. Kris is back involved with the funds, Masucci noted. “It’s actually a positive to get the originator of these ideas and these indexes back involved in that particular role. We’re excited about it—it’s been very well-received by the advisors we’ve spoken with.”

 

Fee Dispute?
According to Masucci, PureFunds filed a lawsuit against the PureFunds advisors and trustees at the start of May regarding a fee cut. He says the fund’s board of directors saw the fee cut as necessary, given the fee compression in the ETF industry, noting that the First Trust Nasdaq Cybersecurity ETF (CIBR) charged less than HACK. Currently, both funds come with an expense ratio of 0.60%.

“It was the right thing to do, and it’s been extremely well received by the market. We have a requirement to operate first and foremost in the best interests of the shareholders of the fund, and that’s what we do,” Masucci said, noting that the SEC requires that issuers review management fees on a quarterly basis against competing products.

He described Chanin’s involvement in HACK as “grossly inflated since the beginning,” noting that the ideas were those of Kris Monaco and the ISE, and that ETFMG had handled 100% of the operations.

“It was a good story to say that this kid is an ETF wunderkind that created these ideas. I think that’s confusing to the market,” Masucci said. 

Affected Funds

The affected funds include the following:

"This makes the track record of HACK, which is approaching its three-year record, less meaningful. We’d expect that some of the holdings will change as well, given the broad mandate of cybersecurity," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, in reference to the changes.

However, Masucci says Monaco’s new firm has created indexes that are very similar, with all the same holdings. He adds that the new methodology addresses some concerns that the advisor had about the indexes, and although the weights are not the same, they are very close. 

Additionally, two of the PureFunds—the PureFunds Solactive FinTech ETF (FINQ) and the PureFunds ISE Big Data ETF (BIGD)—will cease to trade after the markets close today in a move that had been well-telegraphed previously.

PureFunds is best-known for the success of HACK, which shot to fame shortly after its launch, which was followed by a major international hacking episode that drove assets into the fund. Today it has $1.2 billion in assets under management.  

Contact Heather Bell at [email protected]

 

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