Behind The Success Of New ETFs

Behind The Success Of New ETFs

Virtu offers a behind-the-scenes look at some of the key trends in the ETF space, including what’s driving success among newcomers. 

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Many factors go into making a new ETF successful, and being from a well-established top-tier ETF issuer isn’t necessarily one of them.

That’s one of the key findings in VIRTU’s latest study into ETF asset trends.

A look at the 33 most successful ETFs to come to market in the past two years shows that almost 80% of these funds aren’t from any of the top five ETF issuers—iShares, Vanguard, State Street, PowerShares and Charles Schwab. (Success here is defined as a new ETF that’s gathered at least $200 million in assets in its first two years, is profitable, liquid and is performing well.)

From an issuer perspective, these top issuers certainly cast a long shadow, controlling some 88% of the more than $3.6 trillion in U.S.-listed ETF assets. Their dominance goes on unchallenged. But asset flows and asset growth over time show that, while the top five have remained at the top, market share has changed to the benefit of those that have made cost and distribution a priority.


ETF Issuer Market Share Over Time

Source: Virtu estimates


Consider the case of Vanguard. The giant mutual fund firm entered the ETF market relatively late, and to date, it doesn’t have a whole lot of ETFs compared with iShares, but it has a solid distribution platform, and it’s made its name synonymous with low-cost funds.

“Vanguard’s premise has always been low cost with distribution, which is Schwab’s premise as well. We can see that has helped them both grow into market leaders despite being late entrants,” said Phil Mackintosh, Virtu’s head of trading strategy and analysis. “These days, our trading desk often sees rotations into cheaper ETFs with similar exposure, so people are starting to compare performance with fees.”

“VWO [Vanguard FTSE Emerging Markets ETF] is a good case study for how much you have to discount a second-arrival ETF to get success,” he noted. “Some ETFs tried 15-20% discount to the leader, but VWO was about a third of the price of EEM [iShares MSCI Emerging Markets ETF] when it launched. That’s how much it took to start people switching one for the other.”

For would-be new issuers, Vanguard’s example offers important clues as to what it takes to make it in this business.

“One of the key findings here is that the percentage of success stories coming from nontraditional, non-Top-5 providers is pretty high,” Mackintosh said.


Smart-Beta Angle

Another important trend of those finding success among the well-established providers is a focus on smart-beta and active strategies. According to Virtu, about 75% of the most successful ETF launches in the past two years are smart-beta funds, which today dominate product launches.


Smart-Beta ETFs Dominating New Launches


“ETFs are no longer all index funds. There are a lot of smart-beta products gaining assets quickly,” Mackintosh added. “For anyone arguing that index funds don’t contribute to stock selection, this is evidence to the contrary. Investors are picking lots of thematic and smart-beta tools to make up their portfolios that effectively do a lot of stock selection.”

At play here is the fact that traditional market-cap-weighted index ETFs have been around for 25 years, but smart-beta strategies are still relatively young, in a segment that’s now growing at the same rate index funds did when they first came to market.

A lot of product development and new ETF launches have centered on various ways of slicing and dicing market access other than traditional market cap, and that focus on what’s known as smart beta has worked well for new issuers. It may also bode well for the future.

Smart Beta’s Upside

“There’s no reason new providers can’t be the ones that get bigger in the future,” Mackintosh said. “Maybe the core index portfolio providers are set—the big three—but the smart-beta complex is the space with a lot of upside. Because they’ve just started to compete with mutual funds, these new providers could be the ones to grow dramatically in market share.”

Virtu also detailed other key traits found among the most successful ETF launches in the past few years. Among them, having a strong distribution channel and a recognizable brand behind the ETFs—think firms like Franklin Templeton or Dorsey Wright—is key.

ETFs that are finding scale are also either cheap, first-to-market on a given theme or have really strong performance. They also are cheap to trade and arbitrage—often thanks to optimized baskets of holdings that have lower transaction costs than their counterpart mutual funds—and hedge funds like them.

Retail investors have been driving significant new ETF asset growth, and today represent almost 50% of new ETF creations. But investors like hedge funds also play a critical role in the demand for ETFs, according to Mackintosh. One key trend in the ETF space has been hedge fund adoption of ETFs as a cheap way to allocate assets as opposed to having to set up multi-asset-trading desks, he says.

ETF Trading Has Slowed

When it comes to breaking records, the ETF industry has done it all. From asset flows, to asset totals, to number of funds, to number of providers, all arrows point up. But what hasn’t really grown in recent years is ETF trading.

“One record the industry is not breaking is ETF turnover,” said Mackintosh. “Since 2009, ETF assets have grown sevenfold, but the value that’s traded each day has actually fallen. No one would ever believe that.”


“That trend of retail ownership of ETFs may also be slowing turnover from the early days of active, hedge-fund trading, especially during the credit crisis,” he noted.


ETF Daily Trading Rangebound Despite ETF Asset Growth

Source: VIRTU estimates


Here are the 10 most successful new ETF launches in the past two years, according to Virtu:


Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.