Stuart Forbes, co-founder and product lead at Rize ETF, has revealed the key reason for launching a thematic ETF specialist was to move on from being “a small cog in a big wheel” at Legal & General Investment Management (LGIM).
Speaking to ETF Stream, Forbes said this hindered the team's entrepreneurial mind-sets which is what attracted them to start out on their own.
After spending around a year at LGIM, it was not long before the team began planning the launch of Rize in 2019 eventually unveiling its first two products in February this year.
While Forbes said LGIM was welcoming when it acquired the small team from ETF Securities, they eventually just became a small fish in a big pond when the dust settled.
Forbes explained: “For us, it was about feeling like entrepreneurs and doing our own thing which drove us to set up Rize ETF.”
The four co-founders oversee the whole suite of expertise needed to run an asset management business such as structuring, product development, legal, operations, marketing and distribution.
Despite being a much smaller team compared to LGIM, Forbes stressed fewer errors are made in smaller companies.
“You would think a small company would have lots of gaps but that is not the case because they are under much more scrutiny,” he said.
Rize ETF's co-founders were four out of a five-person team at LGIM that developed ETF Securities' successful thematic ETFs and are confident in continuing these efforts for the thematic specialist.
Forbes said he is not concerned about competing against LGIM’s thematic offering as the co-founders accounted for such a large part of LGIM's thematic ETF team.
Furthermore, Rize ETF is not looking to compete with the ETF frontiers such as BlackRock, Amundi or UBS. As thematics is the only priority, he added the firm is not going to develop a core ETF range.
Other ETF issuers prioritise core equity and fixed income exposures and then “try to squeeze in thematic products on the side, making it very difficult to spend the time needed [for the products to be successful],” Forbes said.
He highlighted BlackRock's iShares offering which dominates the market and will continue to do so. “It will be difficult for anyone to compete in capturing this market share unless the firm has a large wealth management arm attached to it.”
Hence, Rize ETF has distinguished itself as a thematic specialist. When developing ETFs, the firm begins by searching for expertise in a particular sector, acquiring that information and subsequently building a rules-based product with the expert.
“This is largely what active managers are doing within thematics but are just charging a lot more for it,” Forbes said.
Another area he argued Rize ETF benefits from is the speed of developing products. Before a product can be launched at a larger firm, it must be ticked off by several teams and departments whereas a smaller firm can think of a new idea or theme and start testing it straight away.
Beyond the product themselves, Forbes is hoping Rize ETF can bring a new approach to marketing within an industry that continues to use “old school” techniques and strategies.
He said: “It is really important to communicate with retail investors in the long-term. While we are focusing on directing our marketing at intermediaries, it is important that what we put out there is geared towards the retail audience as well as we see it as a growing market."
There has been a significant uptake in thematic investing which has specifically resonated with the retail audience, according to Forbes, but this has not been captured efficiently and no-one is owning the space.
In its efforts to dominate the space, Rize ETF is focusing on including social media as a big part of its marketing strategy, an area that is being neglected by the rest of the asset management industry, according to Forbes.
Advertisement currently used by platforms that target intermediaries and retail investors “is not exciting”, he said. Asking the retail audience for their risk preferences or whether they are looking for income is not appropriate because “they probably do not realise that there is not a lot of income to be had at the moment”.
“You have got to be able to have the right products to utilise social media as people will not care about the launch of a new bond ETF, therefore, it does not work for every asset manager,” he added.
Having worked on developing thematic ETFs since 2014, Forbes is confident the team knows who the buyers are for these specialist products.
Any new player looking to expand into the space will struggle to identify these investors and would need to spend a lot of time on the road. Additionally, competitively pricing these products is very important to expanding an audience.
“You cannot be launching thematic ETFs at 75-80bps in 2020 because people just are not going to buy them,” he continued.
When taking a new thematic ETF to clients, a question always asked is “what companies are in this basket that people are not already holding?”.
Forbes said it is simple enough to think of a new and growing theme, but the difficulty is actually thinking about companies to capture within the potential product.
This usually highlights the issue of being unable to capture the theme in a pure basis. An example used for this was the development of 5G as it was not offering anything that people were not already holding.
Within Europe, Rize ETF has highlighted the UK, Germany and Italy as the three most significant markets. Having launched cannabis and cybersecurity ETFs in February, Forbes hopes to have another two products launched early this summer with the potential for another two ETFs at the end of the year depending on timings.