Investors Shoulder ETFMG's Legal Costs

January 31, 2018

Nasdaq Hits Back

The second lawsuit referenced in ETFMG's revised prospectus remains pending.

In October 2017, Nasdaq sued ETFMG, accusing the company of failing to turn over its share of profits from HACK. Nasdaq also accused ETFMG of breaching a wholesaling agreement by hiring ETFMG Financial, an affiliate owned by Masucci, as the fund's distributor.

Just last week, ETFMG countersued Nasdaq for taking actions that favored CIBR over HACK, as well as for breaching the wholesaling agreement. ETFMG alleges that Nasdaq "flouted" its contractual obligations and tried to "bully" ETFMG into surrendering its existing contractual rights, because Nasdaq had a conflict of interest, being the index provider of CIBR.

ETFMG alleges that once Nasdaq took over ISE, "serious deficiencies" in the maintenance of HACK's index began to arise, including failure to meet minimum capitalization and tax diversification requirements; and letting HACK's implied liquidity fall, complicating market making for the fund.

ETFMG also makes the extraordinary claim that as retaliation for replacing Nasdaq as the index provider on the erstwhile PureFunds ETFs, Nasdaq intentionally cut off ETFMG's access to index data for GAMR and IFLY. The problem, which first arose on Aug. 4, 2017, according to court documents, persisted for several days, despite repeated requests from ETFMG for assistance.

ETFMG's countersuit of Nasdaq is not mentioned in the newly revised prospectus, even though the litigation was filed the previous day.

Legal Woes Stall HACK Flows

ETFMG's legal entanglements appear to have stagnated growth in the high-profile, $1.2 billion fund at the heart of the controversies.

The cybersecurity ETF HACK debuted with a bang in November 2014, swelling to $1 billion in assets under management in just seven months. Yet since mid-2017, HACK's AUM has remained relatively constant at $1.2 billion, and the fund saw net outflows for the five months after the PureFunds rebranding took place and the PureShares lawsuit became widely known (see Table 1).

In contrast CIBR—HACK's only direct competitor—has seen steady, if modest, inflows every month since October 2016.

Though CIBR receives a slight boost in net flows every time ETFMG's lawsuits make news, the ETF doesn't seem to be siphoning significant assets from HACK. Even CIBR's slight performance edge—the fund has returned 19.7% over 12 months, compared with HACK's 18.8%—has translated into little in the way of additional flows. 

 

Table 1: Net Monthly Flows for Hack & CIBR ($M)
  HACK CIBR Notes
Feb-17 78.40 29.83  
Mar-17 0.00 13.93 ETFMG Board votes for fee cut
Apr-17 -7.43 10.69  
May-17 95.66 26.16 Fee cut occurs; PureShares lawsuit filed
Jun-17 65.79 18.64  
Jul-17 40.90 14.19  
Aug-17 -55.10 21.00 PureFunds ETFs rebranded; Prime Indexes replaces ISE as indexer
Sep-17 -28.24 10.92  
Oct-17 -4.58 19.85 Nasdaq lawsuit filed
Nov-17 -6.27 12.01  
Dec-17 -14.90 10.47  
Jan-18 21.57 10.59 PureShares suit thrown out; ETFMG countersues Nasdaq
       
Total AUM 1220 412  

Source: ETF.com

Data for January 2018 from Jan. 1 - Jan. 29

 

SILJ, GAMR, IPAY & IFLY Unscathed

On the bright side for ETFMG, the lawsuits appear to have had no impact on the other four former PureFunds ETFs that still trade today, even though they are shouldering the costs of HACK's legal battles (see Table 2).

 

Table 2: Net Monthly Flows for SILJ, IFLY, GAMR & IPAY ($M)
  SILJ IFLY+ GAMR+ IPAY
Feb-17 9.95 - - 9.43
Mar-17 -0.6 1.38 0 15.25
Apr-17 0 0 0 5.61
May-17 -4.28 1.57 5.88 15.73
Jun-17 -2.54 3.13 12.4 11.87
Jul-17 0 3.23 -2.09 10.93
Aug-17 0.63 4.98 4.26 6.21
Sep-17 3.75 8.88 4.45 12.87
Oct-17 0.61 5.45 4.49 21.74
Nov-17 -1.56 1.83 14.08 30.76
Dec-17 0.13 -0.05 2.32 11.84
Jan-18 2.38 -0.01 25.16 35.12
         
Total AUM 59.05 47.24 92.75 311.28

Source: ETF.com

Data for January 2018 from Jan. 1 - Jan. 29. + IFLY and GAMR did not start trading until March 2016

 

These funds' asset-inflow consistency likely has to do with the fact that SILJ, IFLY, IPAY and GAMR are the only funds of their kind in their respective spaces. HACK is the only former PureFunds ETF with a competitor—which it now charges 0.04% more in fees.

ETFMG did not respond to repeated requests for comment in time for publication.

Contact Lara Crigger at [email protected]

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