How can small ETF providers compete?

David Tuckwell

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Making it as a small ETF provider is harder than ever.

Fifteen years ago, small providers like Rydex could come up with smart innovative products – like equal weighted S&P 500 trackers – and sell them with sales teams of three or four people. Bruce Bond could carve PowerShares out of a rock then sell out four years later for $50 million.

But those days are gone.

These days, the ETF model has been proven to work. Every major asset manager, bank - and some insurance companies - has or wants an ETF arm. ETFs are slowly but inevitably becoming a share class or functionality on almost every fund.

Article: Medium-sized ETF providers are dying off 

As big companies have flooded the market, the industry is becoming more capital intensive and at a lower margin. Barriers to entry have grown.

In this kind of setting, how – if at all – can small players make headways?

“I first entered the US ETF industry in 2005. At that time many of the people we spoke to said: ‘how can you enter now? It’s too late. You’re the fourteenth ETF company to launch in the US’,” says Christian Magoon, the CEO of Amplify ETFs.

“That company was Claymore, which then sold to Guggenheim and is now part of Invesco. We were able to carve out a space despite there being 1,000 ETFs and about 6,000 mutual funds in the market.”

Amplify is one of the newest pure play ETF providers to enter the US market. Despite being only three years old the company has managed to suck in more than $500 million in assets under management. They’ve done so in an increasingly competitive environment, managing to grow their assets 66% in 2018.

So what’s the secret?

Products: you have to do something different

The first port of call for any smaller provider is product, Mr Magoon told ETF Stream at the Inside ETFs conference.

“You have to differentiate yourself. You have to be idea-driven and bring something new to market.

“You need products that are going to open doors.”

In the ETF industry, smaller companies tend to be the ones pushing the frontiers of product innovation, as frontiers are where margins are highest and competition the thinnest.

Thus thematic ETFs – tracking everything from the obesity industry, to marijuana, to women’s rights – have been heavily driven by smaller providers. And hence it’s the smaller providers and start-ups knocking loudest on the cryptocurrency door.

But in reaching for new ideas, Mr Magoon says, it is crucial that hopeful providers don’t make funds that are gimmicks or “just weird”. They have to provide advisers something they can actually use.

Here, Amplify’s multi-asset Black Swan ETF (SWAN), which dives in and out of treasuries and equities depending on market conditions, has been a dream. The fund – which listed late-2018 – hit breakeven after a week and a half, Mr Magoon says.

“Advisers we were speaking to were expressing concerns about overpriced growth stocks… what better to hedge [those exposures] than a black swan ETF?”

Making matters better: when making new products, small providers can use big providers’ size against them, he says.

Big asset managers may be flush with money, but they’re also flush with bureaucracy, which slows decision-making down. Internal politicking is also rife, which makes a certain personality type more likely to ascend and survive, he argues.

“The sad truth about the US ETF industry is that there have been great businesses built from the ground up that have then sold to large multi-national asset managers. When that happens the entrepreneurial people all leave and the managers and maintainers stay there. They aren’t growers or risk-takers: they’re survivors.”

“The good news is that creates opportunities for people like me who are willing to take those risks.”

Sales: no easy solve

It’s one thing to come up with products; selling them is quite another.

Here, smaller providers are at a disadvantage.

BlackRock, an S&P 500-listed company, can run slick advisor education events at five-star hotels. State Street, also an S&P 500 company, can take out ads in the Wall St Journal. The big players can hire big sales teams and run a warehouse-style sales factory. (One sales guy for endowments, another for platforms, another for the Midwest, etc.)

Having a powerful name like State Street, Vanguard and BlackRock also helps with cold calling. Advisors are more likely to take your calls and answer your emails if you are from a company they know – much like shoppers are more likely pause at the window if clothing is from a familiar brand.

Here, there is no easy way out for smaller players.

“We rely heavily on technology and experience,” Mr Magoon says, pointing to the fact that Amplify has a highly experienced team.

“Firms outside the top 20 in the US… there is no way you can compete on the scale side.”

Marketing: making yourself visible

Smaller providers also have to market their products differently. (Ads on the Golf Channel and celebrity endorsements from Elizabeth Banks are too expensive for most).

In recent years, the trend for smaller providers has been to provide intellectual content and research. Research costs less money to produce (although it does cost time) and can be a useful battering ram for CFA types on the lookout for good investment ideas.

On this score, Cambria and its front man Meb Faber, has been the trailblazer, having penned more than 2,000 blogs and more than a dozen white papers the past several years.

Single product providers, like Hull, Syntax and Vesper (whose UTRN product I’d recommend any reader check out if they have the time) have taken this to another level, basing their offering entirely on research.

But for Mr Magoon, the strategy is more direct: he is an interview machine.

“Whether its print or podcast or TV we’re pretty available. I think last years I did over 350 interviews in one format or the other.”

“Different than creating a lot of content… if I had Meb [Faber’s] talents and abilities I’d probably do the same thing.”


Featured Image: Amplify ETFs rings NYSE bell. Source: NYSE

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