Earlier this week, when my colleague Sumit Roy dug into the year's top-performing ETFs, he found something surprising.
Source: StockCharts.com; data as of Oct. 4, 2018
Despite XWEB's gangbusters performance, the ETF has struggled to accrue assets. Since its launch more than two years ago, XWEB has only taken in $67 million in assets under management—and $59 million of those assets have only entered the fund since May.
An internet ETF that outperforms is no big shocker. But an internet ETF that outperforms, only to be met with a collective shrug from investors? That's a different story.
Under XWEB's Hood
XWEB tracks an equal-weighted index of U.S. internet stocks; primarily software companies, which comprise 23% of its portfolio, and internet services companies, which comprise another 23%.
Equal-weighting means internet giants like Amazon (AMZN) and Alphabet (GOOGL) are given as much weight in the portfolio as smaller stocks, like Yelp (YELP) or TripAdvisor (LTRPA). That's been good for XWEB's returns, as many internet small-caps have soared this year.
But despite its positives, XWEB's unusual portfolio may be giving investors pause. Because although XWEB is a U.S. internet stock ETF, understanding which stocks are included and which ones aren't isn't exactly intuitive.
XWEB isn't a sector fund, but a thematic one. Its benchmark is constructed from subindustries within three separate GICS sectors: internet and direct marketing retail (which is part of the consumer discretionary sector); internet services and infrastructure (which is part of information technology); and interactive media and services (part of the new communication services sector).
That makes XWEB one of State Street's few cross-disciplinary ETFs, as compared with the firm's sector funds, the Select Sector SPDRs, which have a wide following.
In fact, the Select Sector SPDRs are so popular that they've likely cannibalized much of XWEB's prospective investor base. Many more assets have been put into easier-to-understand pure-play sector bets, like the $23 billion Technology Select Sector SPDR ETF (XLK) and the $2.3 billion Communication Services Select Sector SPDR Fund (XLC).
Shielded From GICS Changes
One point in XWEB's favor is that it was largely insulated from the big sector shake-up that impacted many of State Street's other GICS-based ETFs (read: "How Sector Changes Impact Portfolios").
During the GICS reclassification, thousands of companies switched classifications, ending up in different sectors and sometimes different subindustry groups.
Many of the companies in XWEB's portfolio also changed designations. Often, however, they switched from one subindustry group in XWEB's benchmark to another. For example, Yelp switched from internet software and services to interactive media and services, both of which were subindustries included in XWEB's benchmark before and after the GICS reorganization.
That meant XWEB's portfolio remained more or less the same throughout the biggest overhaul to the GICS in history, as compared with XLK or the Consumer Discretionary Select Sector SPDR Fund (XLY), which saw hundreds of companies move in and out.
XWEB: Too Costly In Comparison?
Ultimately, XWEB's struggles to attract assets may come back to cost.
Although XWEB's expense ratio of 0.35% is cheap compared with other internet ETFs, it is more expensive than the popular tech-based funds within State Street's sector suite, which offer similar (if not equivalent) exposure. XLC and XLK, for example, cost just 0.13%, or less than half of XWEB.
On top of that, XWEB carries an average spread of 0.18%, making it difficult to lure institutional investors away from XLK or XLC, which trade with spreads of 0.01% and 0.03%, respectively.
Given this, it's hard to see XWEB gaining much of a following, despite its impressive performance year-to-date, unless something significant changes—which could always happen.
Contact Lara Crigger at [email protected]