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Investors have swarmed like bees around a honeypot to the VanEck Vectors Social Sentiment ETF (BUZZ).
The fund, which targets the US stocks favoured by investment-related posts on social media sites, has already harvested $420m of assets, just weeks after its launch last month.
But, in a period when exchange traded funds have been attracting record inflows, less sexy ETFs have also been raising significant assets straight out of the gate. Their rapid success stands in sharp contrast to the experience of mutual funds, where many investors want to see a three-year track record before parting with their cash.
In the US, 62 ETFs launched since the start of 2020 have already raised at least $100m, according to data from New York-based CFRA Research. Europe has also seen 62 equally successful debuts over the same period, while in the Asia-Pacific region there have been 13, according to data provider TrackInsight.
Their instant success could be explained by the way ETFs work. Most ETFs are passive so, in contrast to mutual funds, which are usually actively managed, the skill of the ETF manager is irrelevant as long as the fund is capable of faithfully replicating its benchmark.
“Investors do not need to see a three-year track record to see that Invesco can track the index,” said Andrew Jamieson, global head of ETF product at Citi, of Invesco’s Nasdaq Next Gen 100 ETF (QQQJ), which has already amassed $1.1bn after launching in October.
Yet that is not the full story; just over half the $100m-plus launches in the US, 32 in total, are classed as actively managed funds.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA, instead pointed to the greater openness of ETFs, such as divulging their complete holdings in most cases and publishing back-tested performance data for their underlying index.
“People believe they understand what they are getting with an ETF that is index based and transparent. Investors are responding quickly to new products and not treating them like a mutual fund or a fine wine needing to age well,” he said. “You can also look at how that index has performed historically as a guide.”
He added that initial marketing can be more muted for mutual funds. “A mutual fund will launch and [the fund house] doesn’t make much of a fuss because then if they don’t perform well, no one knows that the fund was a dud.”
Another factor is the sheer volume of narrowly focused, thematic ETFs currently being launched. These typically come with a “story” that can make them an easier sell.
“You don’t need to see a three-year track record when the time to invest in [for example] telemedicine might be better today than it will be in three years. Through the ETF wrapper, asset managers can be more nimble rather than having to incubate a mutual fund for three years,” said Rosenbluth.
The Global X Telemedicine & Digital Health ETF (EDOC) has been one of the most successful recent launches, gathering $781m since listing in July. However, it is far from alone, with 15 US-domiciled factor or thematic ETFs having amassed at least $100m since the start of last year, according to CFRA.
They include the AdvisorShares Pure US Cannabis ETF (MSOS), launched in September, which has $1bn, and the Goldman Sachs Innovate Equity ETF (GINN), which tracks a bespoke “thematic beta” index, based on concepts such as finance “reimagined”, “new age” consumers and human evolution. It has gathered $427m since September.
A further four industry sector ETFs are on the list, headed by the Roundhill Sports Betting & iGaming ETF (BETZ), which has taken advantage of the ongoing legalisation of the sector in the US to raise $497m since first pitching to investors in June.
Aside from thematic or sector funds, Rosenbluth said other successful ETF launches tended to either be actively managed, be cheaper versions of what is already available, or be sponsored by large institutions.
One example that ticks the latter two boxes is the JPMorgan BetaBuilders US Mid Cap Equity ETF (BBMC), last year’s most successful US launch, raising $1.6bn since April.
“JPMorgan affiliates would be among the users of this ETF. It’s cheap and diversified. It’s relatively boring. It doesn’t need three years’ history to prove its value,” Rosenbluth said.
The second best seller, Invesco’s QQQJ, is also in essence a US mid-cap play, targeting the 101st to 200th largest non-financials stocks listed on the Nasdaq exchange.
“People are looking for the next Faangs,” said Jamieson, referring to the largest tech stocks, which many believe to be overvalued.
“There is a race to find the next generation of technologically disruptive stocks. [The fund] is targeting millennial investors. People have disposable income and they are putting it into ETFs.”
Europeans appear to have rather less confidence in their domestic market, however — none of the 10 best-selling launches over the past 15 months are focused on European assets, the TrackInsight data show.
Five are predicated on US equities, with one focused on each of US corporate bonds, Chinese bonds, emerging market equities, global equities and bitcoin.
The most successful has been State Street Global Advisors’ SPDR Bloomberg SASB US Corporate ESG Ucits ETF (USCR), which has racked up $5.4bn since October.
Another fixed income offering, the iShares China CNY Bond Ucits ETF (CNYB), has taken second spot, raising $3.4bn since May.
In the Asia-Pacific region itself, pole position has gone to the Hong Kong-focused CSOP Hang Seng Tech Index ETF (3033), which since August has amassed $990m.
Globally, iShares has seen 20 $100m-plus launches in the past 15 months, according to TrackInsight, ahead of French duo Lyxor (eight) and Amundi (seven). Fifty asset managers have chalked up at least one.