ETFs That Thrive on Their Love of ETFs

Once dominated by banks, the emergence of ETFs has elevated a new batch of leaders to the top of the industry food chain, with some becoming prominent public companies. 

Their shares obviously have found their way into niche ETFs that target the financial sector. 

That’s right: the investment management industry has evolved to the point where financial advisors can consider ETFs whose long-term return might just benefit from the continued success, and concentration of power, of the ETF industry. Growing to $12 trillion globally over 30 years, exchange-traded funds have permanently altered the investing world.

In recent years, a narrow group of mega-firms at the top of the asset management rankings, along with companies like S&P Global becoming sources for indexes used to create ETFs, is further changing the face of finance. 

ETFs That Owe Some Success to…ETFs! 

For instance, the $430 million iShares US Broker Dealers & Securities Exchanges ETF (IAI) contains 33 stocks, most of which span multiple disciplines within the financial sector. However, one common thread among the largest holdings of this focused ETF (with more than 70% in the top 10 stocks) is, you guessed it, some pivotal role in the ETF business. Whether it is licensing their indexes to create funds, managing those funds, or other roles, more than half of IAI’s assets can be tied to stocks that owe a significant part of their growth in recent years to the secular expansion of ETFs.

The $326 million SPDR S&P Capital Markets ETF (KCE) contains many more of these types of stocks, but in smaller quantities, given that its assets are spread across more than 140 stocks. And, the sector’s largest fund, the $37 billion Financial Select Sector SPDR ETF (XLF) is crowded at the top with Warren Buffett’s Berkshire Hathaway and some of the money center banks. But underneath are smaller positions in ETF industry giants like Blackrock, State Street, Invesco, Schwab, Morgan Stanley, and Franklin Templeton.

One Place You Won’t Find Vanguard 

Some of the ETF industry’s major players aren't represented here. Vanguard and First Trust, two of the largest firms by revenue and assets, don't have shares that trade on public markets and the same goes for ProShares and VanEck, each of which in the top dozen ETF issuers by size.

We haven't reached the point where someone has decided it makes sense to create an ETF that primarily targets the growth of the ETF industry. It reminds me of an old line from the TV comedy series “Mad About You,” in which the lead characters are making a documentary about how a documentary was made. They referred to it as “the making of the making of.”

But the way ETFs are growing in size, stature and importance to the entire financial services industry, should we not discount the potential that the industry itself could at some point be the key driver of enough public companies that an ETF industry ETF might make sense to an issuer? As Paul Reiser, Helen Hunt’s co-star in the aforementioned program, often declared, “this is what I’m saying.”