Small ETF Issuer’s Road To Success

February 07, 2020

Defiance ETFs is small new issuer working to carve out a niche in the growing segment of thematic ETFs. One of the firm’s newer and bigger successes is the Defiance Next Gen Connectivity ETF (FIVG), which gathered $220 million in assets in less than a year. We caught up with Paul Dellaquila, president of Defiance ETFs, to talk about how the firm is navigating a market filled with giants and is finding success.

 

ETF.com: Defiance seems to be building a lineup of next-generation thematic ETFs. Is that how the firm is positioning itself, or is this just the first round?

Paul Dellaquila: One of our tag lines is "ETFs built for the next generation." We wanted to come up with unique exposures that are focused on the next generation of investors—in transformative technologies, transformative industries that are going to impact our lives for years to come.

 

We also play into how advisors, institutions and investors in general have begun to use ETFs in different ways. For many years, ETFs were core building blocks of core exposure. We’re now seeing a lot more investors complement the core of their portfolio with thematic ETFs as a way to generate alpha, or just to add differentiation.

 

ETF.com: Asset flow trends show that there’s strong demand for your lowest-cost core beta products. Is that making it more difficult to pitch thematic—often higher-cost—ETFs?

Dellaquila: That’s a good question. When an investor looks at an ETF, cost is probably the first metric they look at. It shouldn't be the only one. We’ve tried to offer up our thematic ETFs at a price point that’s attractive to investors. We're in the 30-40 basis point range, which is very attractive relative to the other thematic ETFs out there.

 

That said, being a new issuer is extremely difficult. It’s much more difficult to get your ETF to grow from a $2.5 million or $5 million seed to $100 million. Once you hit that magic number, it gets a whole lot easier to sell. It's way easier to go from $100 million to $1 billion.

 

But we had tail winds at our back. My business partner, Matt Bielski, and I have over 30 years' [combined] ETF experience. We have a lot of relationships in the industry. We pulled every lever we could. But we set a solid foundation, and I think it’s going to be an exponentially big road for us this year.

ETF.com: Let’s talk about that—the ETF distribution challenge. As a new issuer, are you taking a boots-on-the-ground sales approach, or are things like commission-free platforms having an impact?

Dellaquila: The commission-free platform thing was great for us, because we don't have to play that game at all. But you still also need people—not as many boots on the ground as in years past, but some.

 

We try to go the path of least resistance. We have a team of seven dedicated to Defiance ETFs every single day. We can't compete with the multitude of wholesalers and distribution people that BlackRock, Vanguard, State Street have.

 

So, we attacked it differently. We did it through digital channels. We spend a lot on digital advertising. We've built out technology internally—in addition to our ETF lineup—that helps us with Google search optimization, keyword optimization, so that we can compete with the biggest competitors out there.

 

ETF.com: Let's talk about the success of FIVG. It's grown quickly. What’s worked well with that ETF?

Dellaquila: Being first mover is always an important thing. It doesn't mean it's the only way to win, but it's a good start.

 

We looked at the market and we saw interest in 5G investing. We did a huge push digitally around 5G. I even had friends that weren't in our industry tell me, "I'm getting these FIVG ads everywhere." We blanketed it, and we got a ton of traction. Timing was also important. We had tail winds at our back because the news cycle was picking up big time off 5G. Everyone was talking about 5G technology.

 

We also built a product that encompasses the 5G rollout better than anything else out there. And we priced it competitively, at 0.30%. It was really a multitude of factors that worked out well.

 

ETF.com: How are your clients implementing this ETF into their portfolios?

Dellaquila: First, most people look at 5G as a technology exposure. So, FIVG is a complement to a core-type trade. But it can be used as a next-generation telecom play, too, especially after the GICS sector change around telecommunications. In FIVG, you have your traditional telecoms—the AT&Ts and Verizons of the world—but you also have the chip manufacturers, the infrastructure plays for 5G.

 

We tried to capture the entire ecosystem of the 5G buildout and do it in a way that gives you a little bit of that traditional telecomlike exposure without being overly weighted to some of the big mega caps that most people already own in their portfolio in some way, shape or form.

 

ETF.com: So, you could fill that telecom sector sleeve in a sector rotation with FIVG?

Dellaquila: Without a doubt. Most people are looking at us as a technology play. I think the more interesting way is as a telecommunication play. If you're into sector rotation, this is something you can actually look at very [seriously].

 

ETF.com: When it comes to next-gen thematic ETFs, do you have to target your sales to younger investors? And if so, how do you overcome the asset growth challenge given that most assets are in the hands of older investors?

Dellaquila: It's the dilemma of our industry. You want to target the people that are coming up, but they don't have the wealth. With 5G specifically, it's a technology that, if you have a mobile phone, you're going to experience it. Demographics don’t play a huge part in this conversation.

 

But some of our other ideas are more focused on those next generations of investors. The reality is those investors right now are underserved by the financial service community. And they’re going to start making more money. We expect to see trillions of dollars of wealth transfer from baby boomers over to the younger generations. We're not looking at this as a short-term play. We're in this for the long term.

 

Contact Cinthia Murphy at [email protected]

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