Here’s A Wild Idea: The ETF ETF

by on August 17, 2011 | ETFs Mentioned:

As the ETF industry has seen assets climb past the $1.1 trillion mark in recent months, the number of funds has also increased dramatically. There are now close to 1,300 ETFs available to U.S. investors, and hundreds more in the pipeline that could hit the market at some point in the not-so-distant future. While some of the new introductions are “plain vanilla” funds focusing on well known stock and bond markets, most of the growth in the number of ETPs has been attributable to more targeted and complex funds offering exposure to narrow asset classes or investment theses.

Some of the recent launches highlight this point perfectly. The past few years have seen investors embrace a lithium ETF, rare earth metals ETF, and smartphone ETF. Last month First Trust launched SKYY, the first cloud computing ETF, and the product quickly raked in more than $50 million in assets. Recent SEC filings laying the groundwork for future products have included ideas such as a cement ETF and a railroad ETF.

There is clearly a market for ETFs that tap into compelling investment themes and corners of the global economy that are expected to expand rapidly in coming years. Few markets have seen the level of growth experienced by the ETF space in recent years, and the consensus opinion is that the pace of expansion will continue–or perhaps even accelerate–in the future [for analysis of all new ETFs, sign up for the free ETFdb newsletter].

So why not build an ETF that is built around an investment thesis of continued expansion in the ETF industry? Given the bright future for the exchange-traded fund space–and obviously intense interest in all things ETF–investors might jump at the chance to access a corner of the finance market that stands to benefit from growth in assets.

Building The ETF ETF

The challenge, of course, is that there are few pure play, publicly-traded ETF issuers. Many of the smaller players in the space are privately held, while the big dogs of the industry are parts of larger financial behemoths. It is, in a sense, the same obstacle that arises when attempting to build hyper-targeted funds focusing on themes such as cloud computing: many of the biggest players in the space have other operations that have a more meaningful impact on bottom line profitability, while investments in the smaller pure play companies is not possible.

Still, building an ETF consisting entirely of companies with meaningful ETF-related operations would be relatively easy. Starting with ETF issuers, a number of companies would be eligible for inclusion:

  • BlackRock (BLK): The world’s largest money manager has a major stake in the ETF industry after acquiring iShares from Barclays in 2009. Of course, BlackRock also has operations in just about every other aspect of the investment business, including mutual, closed end funds, and managed accounts.
  • State Street (STT): The firm behind the ultra-popular GLD and SPY would of course be included in any “ETF ETF,” as the Boston-based company is one of the largest issuers of ETFs. Similar to BlackRock, STT is a diversified financial giant, with operations in just about every corner of the industry.
  • Invesco (IVZ): The mutual fund giant acquired PowerShares in 2006, and growth in the ETF unit has translated into an increased impact on the company’s bottom line.
  • Allianz SE (ALV: GR): The German financial giant acquired a majority ownership interest in PIMCO about a decade ago. PIMCO is a relative newcomer to the ETF industry, but the California-based firm’s assets have climbed gradually–and could spike again when the ETF version of the Total Return Fund debuts.
  • WisdomTree (WETF): The only publicly-traded, pure play ETF issuer, WisdomTree recently completed a jump from the Pink Sheets to the NASDAQ. The issuer behind a suite of dividend-weighted ETFs recently reported impressive growth in earnings for the second quarter.
  • BNY Mellon (BK): BONY touches several different aspects of the ETF industry, serving a number of different ETF issuers in various ways. Growth in ETF assets and trading activity should boost earnings for BK.
  • Charles Schwab (SCHW): Schwab is another latecomer to the ETF space that has seen impressive growth in assets. While Chuck probably doesn’t earn much from management fees–expense ratios are among the lowest in the industry–growth of ETF assets boosts the company’s revenues in other ways (such as trading commissions).
  • Deutsche Bank (DB): Deutsche is another company that is involved in the ETF industry in several different ways; from the partnership with PowerShares to services offered to other issuers,
  • Royal Bank of Scotland (LSE: RBS): This European banking giant is a relative newcomer to the U.S. ETF industry, and currently offers a suite of Trendpilot ETNs.
  • UBS: Another European financial behemoth, UBS has been involved in the U.S. ETF industry for a bit longer. Currently, the UBS suite of products consists of a number of commodity and MLP-focused ETNs, as well as a unique VIX-related product (XVIX).

The list could go on and on; Citigroup, Credit Suisse, and TD Ameritrade are just a few of the institutions with a hand in the ETF industry. Throw in some more brokerages, index providers, and lead market makers, and you’ve got the makings of a specialized financial ETF that would have plenty of depth and balance of holdings–not to mention a relatively sound investment thesis.

Time will tell if an ETF Fund ever makes it to market. Just in case there’s an issuer out there working on the details now, I’ll leave a little money tucked aside.

Disclosure: No positions at time of writing.