Ownership of two of the five funds—PHB and SPFF—appears fairly well-distributed across the investor base. The other three ETFs, however, demonstrate dramatically concentrated ownership.
The market's largest smart-beta bond ETF, FlexShares' TDTT, is owned 82% by Northern Trust, which is the fund's index provider and manager. FlexShares' TDTF is dually dominated by Northern Trust and Charles Schwab, accounting for a 46% and 41% share, respectively. What's more, large firms apparently account for 99% of the ownership of both these funds.
The most egregious ownership concentration, however, is in VBND, which is 96% owned by Ronald Blue & Co. Just seven 13F filings represent a whopping 98% of the ETF's ownership.
Who Owns What … And Why?
The data reveal that ownership for several smart-beta funds in narrower equity sectors or in fixed income is concentrated, sometimes extremely so.
If we define "concentrated ownership" as a 20% or more stake by one party, then the funds showing concentrated ownership include:
- ICF, iShares's REIT fund (22% owned by BlackRock)
- FXG, First Trust's consumer staples ETF (36% owned by First Trust Advisors)
- FXH, First Trust's health care fund (35% owned by First Trust Advisors)
- TDTT, FlexShares' 3-year TIPS fund (82% owned by Northern Trust Investments)
- TDTF, FlexShares' 5-year TIPS fund (46% owned by Northern Trust Investments, 41% owned by Charles Schwab)
- VBND, Vident's broad market bond ETF (96% owned by Ronald Blue & Co)
Just who are these companies? iShares, of course, is BlackRock's ETF arm. First Trust Advisors is an affiliate of First Trust Portfolios, which sponsors the AlphaDex ETFs. And Northern Trust Investments indexes and manages the FlexShares ETFs. Essentially, all three are firms with great incentive to ensure their funds' success.
VBND is a horse of a different color, however. As we reported back in 2014, VBND is a bespoke product Vident created especially for Ronald Blue & Co., an $8 billion Atlanta RIA, as a response to Bill Gross leaving PIMCO.
It's clear that some smart-beta funds have wide investors appeal, while others, not so much. Despite significant assets, funds like TDTT, TDTF, FXG and FXH aren't drawing the wide swaths of institutions, advisors or small investors needed to survive. Instead, these funds appear to be propped up, to varying degrees, by their own managers.
Why? The answer may be as simple as relevancy. Smart-beta funds are an excellent, on-trend way for issuers to keep their names in front of investors, especially in untapped areas such as fixed income or hot stock sectors. But funds take time to catch on with investors; in the meantime, providers will do what they can to keep their funds afloat.
Also possible: Firms like Northern Trust and First Trust—with their strong distribution platforms and significant client bases—are acting as agents for other investors, meaning they're using the ETFs for their own clients, much as Ronald Blue uses VBND for theirs, just on a larger scale.
We don't know for sure: Northern Trust declined to comment on this story, and First Trust did not reply to requests for comment in time for publication.
Ultimately, however, only time will tell whether these funds can attract a wider range of investors.