There’s an exchange-traded fund providing an investible basket of securities for just about every industry imaginable, so why hasn’t there been one that invests in the companies responsible for the creation, trading, marketing and distribution of ETFs? It seemed like an intuitive idea sitting under the industry’s nose.
“If it was easy to just create the ETF sector, it would’ve been done already,” says Mike Venuto, chief investment officer of Toroso Investments LLC. “It’s a growing and somewhat new industry. This isn’t simply a sector ETF; it’s an ecosystem ETF by the time we included the entire industry.”
Venuto and his partner, Toroso CEO Guillermo Trias, spearheaded the creation of the index behind the ETF Industry Exposure & Financial Services ETF (TETF), which began trading Thursday on the NYSE Arca exchange. Based in New York City, Toroso is an asset management and research firm that works with registered investment advisors and ETF issuers.
The index contains 37 companies that play a role in the process of taking ETFs from initial idea to investible product, and is constructed based on the depth of their involvement in the space. Fifty percent of the index contains ETF sponsors. The other 50 percent is composed of what Venuto calls the other four parts of the ecosystem: liquidity providers; index providers; back office support and the exchanges.
Specifically, the index is divided into four tiers:
• Tier 1 — 50 percent comprises ETF providers including BlackRock, Charles Schwab, Invesco, State Street, WisdomTree and others.
• Tier 2 — 25 percent comprises companies with a substantial participation in the ETF industry, including KCG Holdings, NASDAQ, Intercontinental Exchange Inc. and others.
• Tier 3 —15 percent comprises companies with moderate levels of participation in industry, such as Bank of New York Mellon, US Bancorp, FactSet, Ameriprise Financial and more.
• Tier 4 —10 percent comprises companies that are new or participating in a smaller way in the ETF industry relative to their overall focus, and includes such names as Morningstar, Eaton Vance, Goldman Sachs, Legg Mason and Citigroup, among others.
The TETF fund’s expense ratio is 0.64 percent. The portfolio leans toward large-cap companies, and it will be reconstituted twice yearly.
Growth Industry
The business press is filled with stories about the phenomenal growth of the ETF space, fueled in large part by investor preference for passive, index-tracking funds over active management that has fueled massive inflows into ETFs at the expense of mutual funds.
According to the press release announcing TETF’s launch, assets in U.S.-listed ETFs have ballooned from $1.2 trillion to $2.7 trillion during the past five years, while the number of U.S. ETF sponsors has jumped from 45 to 78 and the average ownership of U.S. equities by ETFs has more than tripled.