ETF Success Found At Different Levels

Sure the big ETF issuers just keep getting bigger, but other issuers are also getting a piece of the pie.

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Editor-in-Chief
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Reviewed by: Drew Voros
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Edited by: Drew Voros

When you hear talk about the ETF issuers and the industry, certainly much of it has to do with how the big ETF issuers keep getting bigger, and that while the barrier to entry for a new fund is low, the threshold for success is very high, especially for smaller players.

While much of that may be true, it’s easy to fall into the trap that success is too steep a hill to climb for most, because in fact, it can really be found at all levels of the ETF spectrum.

Of course, at the top end of the ETF League is BlackRock’s iShares brand, which should soon become the first issuer to amass $1 trillion in assets. As of the end of July, the firm had some $915 billion, nearly $100 billion more in assets under management than it had at the end of July 2015. You don’t need to be a math whiz to see that the $1 trillion mark could easily be achieved in 2017.

And Vanguard, the No. 2 ETF issuer as measured by AUM, has also had a strong past 12 months, going from roughly $477 billion to $560 billion in those same 12 months, which is a bigger percentage increase than iShares. Few would be surprised by those two examples of success. We hear about them all the time.

Size Doesn’t Matter

But the point of this piece is to shed some light on a few success stories that are not as apparent or repeated. Case in point would be Charles Schwab, which, in percentage terms, had a better 12 months in attracting assets than the oft-talked-about Top Two.

The firm has been quietly climbing the ETF leader board, and last month, the firm topped $50 billion in assets, up more than 40% from its assets level of about $35 billion at the end of July 2015, making it now the fifth-largest ETF issuer.

The company has been offering commission-free Schwab ETFs on its platform, and has become the leader in cutting expense ratios as well. Out of the 20 cheapest ETFs on the U.S. market, 10 are from Schwab—double the nearest competitor, iShares, which has five.

20 Cheapest ETFs

TickerFundIssuerExpense Ratio
XLREReal Estate Select Sector SPDR FundSSgA0.00%
EWREGuggenheim S&P 500 Equal Weight Real Estate ETFGuggenheim0.00%
SCHBSchwab U.S. Broad Market ETFCharles Schwab0.03%
SCHXSchwab U.S Large-Cap ETFCharles Schwab0.03%
ITOTiShares Core S&P Total U.S. Stock Market ETFBlackRock0.03%
VTIVanguard Total Stock Market Index FundVanguard0.05%
VOOVanguard S&P 500 Index FundVanguard0.05%
SCHZSchwab US Aggregate Bond ETFCharles Schwab0.05%
BNDVanguard Total Bond Market Index FundVanguard0.06%
SCHGSchwab U.S. Large-Cap Growth ETFCharles Schwab0.06%
SCHVSchwab U.S. Large-Cap Value ETFCharles Schwab0.06%
IVViShares Core S&P 500 ETFBlackRock0.07%
SCHDSchwab US Dividend Equity ETFCharles Schwab0.07%
SCHASchwab U.S. Small-Cap ETFCharles Schwab0.07%
SCHHSchwab U.S. REIT ETFCharles Schwab0.07%
SCHMSchwab U.S. Mid-Cap ETFCharles Schwab0.07%
SCHPSchwab US TIPS ETFCharles Schwab0.07%
IUSGiShares Core U.S. Growth ETFBlackRock0.07%
IUSViShares Core U.S. Value ETFBlackRock0.07%
AGGiShares Core U.S. Aggregate Bond ETFBlackRock0.08%

 

Schwab has also helped itself with its robo service, Intelligent Portfolios, which uses Schwab ETFs to deliver automated portfolios for the masses. Certainly that ecosystem of commission-free ETFs—very cheap to own ETFs and a robo service using Schwab ETFs—is fueling growth in a unique way.

 

‘Perseverance’ Pays Off

Further down the scale, there are other success stories that few talk about. Take the example of the 3-year-old YieldShares High Income ETF (YYY), which tracks an index of U.S.-listed closed-end funds, weighted by yield, discount to net asset value and trading volume. The fund was started by Christian Magoon, former president of Claymore Securities, which was acquired by Guggenheim Investments.

Last month, the ETF surpassed $100 million in assets in three years, which many small issuers would tell you is a steep hill to climb.

“Perseverance has been key,” Magoon said. “As a smaller ETF, we haven't had any of the platforms at the larger broker-dealers accept the fund, which is too bad for those advisors and clients. Perhaps that will change, but fortunately we knew not to count on them.”

YYY’s performance for the year so far has been strong, up 15.4% versus 6.6% for SPDR S&P 500 ETF Trust (SPY | A-97), and it comes with a distribution yield of 9.86%. Because of the expense that comes with closed-end funds, the expense ratio is 1.86%.

Chart courtesy of StockCharts.com

 

“We still believe buying a basket of CEFs [closed-end funds] at a significant discount to net asset value is an investment opportunity that produces an above-market income stream and capital appreciation potential. We hope the size of the fund today will allow new investment professionals to consider this income solution going forward,” he added.

Magoon will be folding YYY into his new firm that he launched this year, Amplify Investments, where in April he launched a second ETF, the Amplify Online Retail (IBUY) and is planning more as well. He also realizes he is back at the bottom of the hill with IBUY, which has $2.6 million in assets.

Success doesn’t come easy in any endeavor. There have been more than 60 ETFs that have closed or announced they will be closing this year.

While it may be that the big are only getting bigger in the ETF world—State Street’s SPY is about to top $200 billion in assets any day now—the ETF industry is full of success stories in the mid- and lower-tier ranks as well. I will strive to point out more of these in the future.

At the time of writing, the author owned none of the ETFs mentioned. Drew Voros can be reached at [email protected].

 

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.