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ETF Providers Get Creative as They Look for the Next Big Hit

This article was originally published on ETFTrends.com.

After more than two decades, the exchange traded fund industry has more or less covered all the major market themes and categories we can think of. As fund sponsors try to expand their offerings, many ETF providers are getting creative.

With most of the market saturated with traditional plain vanilla, beta index ETF offerings, large issuers are now looking into thematic products, with strategies that cover a number of niche or thinly sliced market segments, such as self-driving cars, artificial intelligence and pet car, Bloomberg reports.

According to Bloomberg Intelligence, more of these thematic ETFs were launched in 2018 than in any other year. However, as Bloomberg pointed out, some have failed to attract a strong following, with some niche strategies closing down.

Among the more neat ETF offerings that have hit the market in recent months, the SPDR Kensho Final Frontiers ETF (XKFF) tries to cover companies that look to new frontiers. XKFF targets the Kensho Final Frontiers Index, which uses artificial intelligence and a quantitative weighting methodology to capture companies whose products and services are driving innovation behind the exploration of the final frontiers, which includes the areas of outer space and the deep sea.

The recently launched ProShares Pet Care ETF (PAWZ) is the first ETF of its kind to cater to a pet care industry. The ETF idea tries to capitalize on a pet care industry that is poised for even further growth as data collated from Grand View Research and other pet industry trends show that sales could reach upwards of $203 billion by the year 2025–a growth of 54% in less than 10 years.

But Wait, There's More

According to regulatory filings, other money managers like Goldman Sachs are planning their own thematic funds, including those that cover the manufacturing revolution and increasingly data-driven landscape.

However, not many investors are quick on the uptake for these targeted strategies.

“Sometimes as quickly as the money comes into those products, it leaves as quickly when the theme runs its time or is no longer relevant,” Steve Dunn, head of ETFs at Aberdeen Standard Investments, told Bloomberg. “Testing that lightning-in-a-bottle - that’s a hard proposition.”

Furthermore, these thematic ETFs typically cost more than your typical passive index-based ETFs. According to Bloomberg Intelligence, the average cost of thematic ETFs have a 0.58% expense ratio. In contrast, the cheapest beta-index ETF comes with a 0.03% expense ratio.

Nevertheless, there are thematic success stories. For example, the ETFMG Alternative Harvest ETF (MJ) , which follows cannabis-related companies, has attracted close to $640 million in assets under management as the fund captured the recent marijuana investment craze.

“You’ll also see a lot more of them launched and a lot more of them closed because of timing or for whatever reasons that theme didn’t resonate,” Eric Balchunas, an ETF analyst at Bloomberg Intelligence, said.

For more information on the ETF industry, visit our ETF Performance Reports category.

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