4 Essentials to Prevent Your ETF from Becoming an Exchange Traded Failure
More than 650 new exchange-traded products launched since the start of 2011 for a total of 1,586 products on the U.S. market as of April 17, 2014. The din of the crowd is making it harder for new voices and new products to stand out to investors in a sea of choices from the likes of iShares, Vanguard, PIMCO, Schwab and State Street. For some, the challenge has been so great that the product sponsors have pulled the plug, as evidenced by a closure rate running more than 35 percent of the issuance rate since 2011.
How do the successful ones make it? How do they overcome the challenge of differentiating themselves in this increasingly saturated market? We note four common trends that greatly increase the chances of success:
- A research supported and well-defined investment thesis.
- Skin in the game in the form of a separate portfolio based on the same investment thesis.
- An innovative twist that differentiates a fund from the hundreds of others that launch each year.
- A rock-solid marketing and PR plan to communicate the first three points and establish brand identity.
Let’s take a look at two fund sponsors that implemented this strategy and overcame major hurdles to succeed in this high competition marketplace.
RevenueShares ETFs came to market in 2008 when things were pretty bleak. The stock market had plummeted, the financial industry was in crisis mode and the Great Recession had set in. The deck was stacked against them.
Another sponsor, AlphaClone, was set to launch the first ever ETF of its kind when it decided to productize its hedge fund position replication methodology. The fund launched in May 2012, barely a month before Global X’s GURU fund launched. Global X, with an established platform and distribution pipeline, quickly usurped the momentum.
How did they make it? RevenueShares, armed with a simple twist on known indexes, went on a brand evangelization campaign. They aimed to create name brand recognition for their funds and educate the advisor community about how their products worked inside a bigger portfolio.
AlphaClone was determined to show that there was room for two such hedge fund position replication ETFs. They persisted by focusing their marketing and PR message around next level thinking, educating their audience about how the best investment minds select their long equity positions.
Earlier this month, I had the chance to present to a room of current and soon-to-be ETF sponsors at an industry event. The room was littered with investors that had successful pedigrees in growing businesses within the financial services arena and beyond; however, not one seat was occupied by the heavy hitters (iShares, Vanguard, etc.). Frankly, they didn’t need to be there. They have the ETF game figured out and whatever they can’t finesse, they can accomplish with brute force that comes with their size. It’s the small to mid-sized outfits that stand to gain the most from leveraging a PR and marketing plan. Getting meaningful publicity for a brand new ETF isn’t everything but it can mean the difference between success and failure.
Money is moving to ETFs in droves. The money invested in US-market based ETPs is closing in on $2 trillion with global ETP assets in excess of $3 trillion, according to ETF Global Insight. Upstart sponsors will be able to see their products be successful alongside those from the established powerhouse issuers. But, to achieve that success, new product sponsors will have to take a cue from those whohave gone before them.