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Treading Carefully With Customized ETFs


Whether it is with burgers, cars or clothes, customization is usually thought of in a positive light. With customized exchange traded funds, however, investors need to be more discerning.

Over the past several years, ETF issuers have increasingly worked with clients, usually other institutional investors or large money managers, to create customized ETFs. The strategy has proven rewarding for the issuers and the end clients, particularly in an environment where it is increasingly difficult for new ETFs to gain traction.

Of the 204 ETFs that debuted last year, 92 have less than $10 million in assets under management and even if the AUM totals for those 92 funds are combined, they would still have fewer assets than the First Trust Dorsey Wright Focus 5 ETF (FV) , reports Eric Rosenbaum for CNBC.

Now home to almost $1.4 billion in assets under management, FV, which debuted in March 2014, is by far the most successful ETF that debuted last year. [Quick Success for Some New ETFs]

So-called bespoke ETFs are big business. “All told, newly minted bespoke ETFs accounted for $3.4 billion in assets in 2014, or fully 36% of the $9.6 billion held in all ETFs launched in the past year, according to a Barron’s tally of research firm XTF’s data, which include exchange-traded notes,” reports Chris Dieterich for Barron’s.

However, not all customized ETFs are intended for all investors and simply because a pension fund or big money manager asks an issuer to create an ETF does not mean that client intends to stick by the fund for five, 10 or 20 years.

Although the outflows have been modest, the Barclays ETN + Enhanced Global High Yield ETN (FIGY) and the Barclays ETN + FI Enhanced Europe 50 ETN (FEEU) , two of the most successful new products launched in 2013 and bespoke ETNs at that, lost a combined $48.2 million last year. Investors can gain access to similar investment objectives as those offered by FEEU and FIGY with an array of established ETFs that are not dependent on one investor to stay afloat. [A Good Year to be a New ETF]

There are success stories from the world of hand-crafted ETFs. The Vident International Equity Fund (VIDI) , another of the most successful ETFs to debut in 2013, needed 12 weeks to top $500 million in assets. While VIDI got a big assist Ronald Blue & Co., an independent fee–only wealth management firm based in Atlanta, the ETF now has almost $688 million in assets, indicating it has been able to attract support beyond its initial investor. [Vident ETF Quick to $500M in AUM]

The iShares MSCI USA Value Weighted Index Fund (VLUE) and the iShares MSCI USA Momentum Factor ETF (MTUM) are two of the four factor ETFs created by BlackRock’s iShares unit in 2013 in conjunction with the Arizona State Retirement System.

Each of those four ETFs was seeded with $100 million, but VLUE and MTUM now have $582.5 million and $500.6 million in AUM, respectively.

Vident International Equity Fund