More ETF Players Enter the Market
But Can They Grab Market Share From the Heavyweights?
December 17, 2007
In the midst of an already crowded marketplace of exchange-traded fund (ETF) providers, two new players are making a run for the end zone hoping to score with investors.
The Securities and Exchange Commission has just given the green light to four innovative, narrowly focused ETFs from FocusShares of Montvale, N.J. Through a licensing agreement, all four ETFs, which were originally registered under the "MyShares" moniker, will track to equity indexes created by the International Securities Exchange (ISE), which created the first fully automated options exchange in May 2000. The firm has been trading options on a slew of niche and novel indexes.
Northern Trust, the Chicago-based bank and financial services company with $761 billion in assets under management, is the sub-advisor to each FocusShares ETF. This represents the first time that Northern Trust will manage ETFs on a day-to-day basis.
FocusShares' ETF lineup includes the FocusShares ISE Homebuilders Index ETF, which includes residential construction firms and prefabricated house manufacturers. The FocusShares ISE SINdex ETF invests in "sin" stocks within the alcohol, tobacco and gaming industries. The FocusShares ISE-CCM Homeland Security Index ETF tracks companies under contract with the U.S. Department of Homeland Security, and, perhaps most unusually, the ISE-Revere Wal-Mart Supplier Index ETF is comprised of companies that rely on a significant portion of their revenue from the distribution of their products through Wal-Mart stores.
"We've created different and innovative indexes, but at the end of the day, they create value for investors," said Bruce Goldberg, senior vice president and and chief marketing officer at ISE. The exchange currently offers three broad-based equity indexes alongside 17 narrowly focused indexes, including a nanotechnology index and a CHIndia index comprised solely of companies domiciled in China and India. The firm offers index options on all of them and has since struck product-licensing deals not just with FocusShares but also with First Trust, in hopes of creating additional partnerships in the future, Goldberg said.
The FocusShares ISE-Revere Wal-Mart Supplier Index currently includes such well-known companies as Clorox, Del Monte, General Mills, Kellogg, Mattel and Tootsie Roll.
An executive with FocusShares did not return a call seeking comment.
So many oddball, narrowly focused ETFs have emerged that there are already several homebuilder ETFs now in existence, said Sonya Morris, editor of Morningstar ETF Investor. Time will tell if institutional investors will want to go quite as narrow as to invest in a Wal-Mart-supplier ETF, she said. "This seems to be a pitch to retail investors," she said.
Moreover, the ETF may be hard to swallow for some. "While Wal-Mart's a great place to distribute your wares, manufacturers could see profits squeezed [by Wal-Mart's heavy-handed approach]," Morris added.
For its part, Northern Trust, once an ETF observer only, is jumping into the ETF market with both feet. Not only will the bank be sub-advising the FocusShares ETFs, but in early November it, too, filed to offer its own lineup of 27 ETFs. The group is expected to debut in 2008. These represent the first proprietarily managed ETFs for Northern Trust and were designed to appeal to both retail and institutional investors.
A spokesman for Northern Trust declined to comment.
The Northern Trust ETFs will be branded under the "NETS" moniker. Eight of the NETS ETFs will track to broader-based indexes, including the Dow Jones Wilshire Global Total Market Index and FTSE CNBC Global 300 Index, as well as four international, single-country real estate indexes. The remaining 19 will track to more narrow equity indexes in single countries including Belgium, Greece, Hong Kong, The Netherlands, Portugal, Russia and South Africa.
The question is: Will all of these niche ETFs be able to find mass appeal among retail and/or institutional investors? Moreover, can the highly competitive marketplace, in which the top three players now control more than 85% of the entire ETF market, make room for yet another two providers? (See accompanying chart.)
According to data from Barclays Global Investors, as of September, Barclays' ETF footprint accounted for more than one half of the entire ETF market all by itself. State Street Global Advisors owned another 22.3% of the market, while Vanguard and PowerShares, a subsidiary of Invesco, are in a dead heat with a nearly 7% lock for each. All told, these top four players dominate close to 95% of the ETF market now.
(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.