Novelty ETFs have a marketing edge

Novelty ETFs are in season, with new funds popping up like mushrooms.

Last week it was the Sports Fans ETF (FANZ), tracking big corporates who sponsor major American sports teams. The week before it was the Quincy Jones ETF (QJ). Named after Michael Jackson's producer, the fund tracks music streaming companies.

This week it was Inspire Corporate Bond Impact ETF (IBD), an evangelical Christian ETF that buys the bonds of companies that observe "biblical values", avoiding pornography, alcohol and gay rights.

There is nothing new about a novelty ETFs as such; they have been in season before.

September 2016 saw the birth of the Obesity ETF (SLIM), the Gender Diversity Index ETF (SHE) and the Video Game Tech ETF (GAMR) - all of which launched within a four-week window.

Now they're back for a 2017 season. Why?

Most of the drive behind novelty ETFs comes from small issuers. Of FANZ, QJ and IBD, not one is listed by a major issuer. Indeed, from the Financial Times' list of the quirkiest ETFs ever listed, only one (SHE) is run by a major issuer. This is no accident.

As the ETF pie has grown, new entrants and smaller issuers have wanted to carve themselves a slice. But they have struggled, for two reasons.

One, they cannot compete on cost if they issue mainstream ETFs. Issuers like Schwab and Fidelity charge only a handful of basis points a year for many of their index trackers - a fee so low that you need over $10 billion in AUM just to stay in business.

Two, they cannot compete on sales teams. Staff are expensive and they need to cover a lot of territory to get their message out as ETFs don't generate enough in fees to pay for advertising. The bigger issuers have lots of sales staff to sell any new ETF but many of the smaller issuers cannot afford even a small sales force.

So how, then, can small issuers enter the market and compete? Ideas.

Ideas are free. And interesting ideas have a marketing advantage: people talk about them, the media reports on them and investors' ears get pricked. The discussions that a new or interest idea generates are, in effect, free marketing.

The other great thing about a new idea is first mover advantage. This is how academics make their careers and how small start-ups break into a market.

Enter novelty ETFs.

Scroll through a Google News feed and witness the sheer volume of coverage the Quincy Jones ETF received. Sure, some was negative: "Quincy Jones ETF is a joke, but it's no laughing matter", wrote the Seattle Times. "You could invest in the new Quincy Jones ETF, but Quincy doesn't recommend it," wrote the popular blog the Heisenberg Report.

But if you're a small issuer, it makes sense to risk the bad press and enjoy the marketing free ride.