Coming up with great product ideas is hard for everyone. But it’s especially hard for bigger companies.
Big businesses have more bureaucracy, more pointless meetings, more internal politics. They tend to be risk averse and have little tolerance for mistakes. This helps ensure that the incentive structure of big organisations is against taking big creative risks.
With this in view, a refreshing fact about ETF product launches in 2019 was that some of the best came from big businesses.
Among them, my favourite was the L&G Clean Water UCITS ETF (GLUG), which invests in global water companies.
GLUG picks and equally weights a portfolio of water management, purification and conservation companies.
For me, GLUG is ETF product innovation done right and one of the high points of a crowded 2019 listing market. Why?
For one, it plugs a real gap in the market. One of the reasons that thematic ETFs have succeeded is that they help fill in the blanks left by GICS. Back in the old days, there were no standardised sector definitions. Investors got to make them up and had a grand old time in doing so.
ETFs like GLUG provide something of a throwback; that is, they give investors a way to express their own views on themes, rather than the McDonalds-style sectors handed down by the big index shops. (To see this at its finest, check out First Trust’s internet ETF, FDN).
For two, this type of product – that targets water-related innovation – is almost certain to have a bright future. Under conservative estimates of global warming (2 degrees Celsius above baseline), water scarcity is set to sharpen. With this, huge investment in water purification and conservation technology will be necessary. Companies positioned here will reap a powerful tailwind.
For three, it avoided performance chasing – a sin that's become all too common in the ETF industry. Commodities in 2011, technology in 2014, cryptocurrency in 2017: ETF issuers want near-certainty that any new products they launch will gather assets. They see evidence of future success in past performance - all the while publishing disclaimers that warn past performance is no guide to the future.
The best kinds of fund launches – like the best kind of investor – avoid acting like sheep. GLUG, to its credit, listed at a time where water investing was out of vogue. It has performed strongly since its listing in July, outperforming the plain vanilla global ETF from iShares (SWDA), partly as a result I would argue.
LGIM's GLUG versus iShares SWDA. Source: Google Finance
At the time of writing, GLUG holds a modest $2.7 million. Running at a headline fee of 0.49%, I would suggest GLUG needs at least another $50 million to be commercially viable. There are several water ETFs in the United States, most of which have attracted enough assets to become commercially viable. Let’s hope GLUG can get there in 2020.