Inside The ‘Me-Too’ ETF Wars
After all, the Global X SuperDividend U.S. ETF (DIV), apart from combining perhaps the two most popular equity ETF strategies going, should sound quite familiar.
The reason DIV’s strategy may sound familiar is because it is. The PowerShares S'P 500 High Dividend Portfolio (SPHD) came out last fall, and both portfolios aim to provide yield-hungry investors with a low-volatility overlay.
The knock-on nature of Global X’s launch is just the latest in what seems like a broad-scale attempt by ETF issuers to replicate one another’s strategy in order to one-up each other.
The way DIV goes about differentiating itself from SPHD is threefold. First, it pulls from the entire U.S. equity universe, as opposed to SPHD, which only pulls from the S'P 500.
Also, although both funds have just 50 holdings, DIV equally weights its holdings, while SPHD weights its stocks by dividend yield, with each firm capped at 3 percent of the portfolio by weight. Both portfolios are therefore fairly balanced, with DIV’s providing a more balanced portfolio by definition.
The third, and perhaps most interesting, distinction is eligibility:DIV includes master limited partnerships (MLPs)—pass-through structures that are likely too small to be included in the S'P 500. In other words, the portfolios are very different, even if the overall strategy is largely the same.
Successful Differentiation?
All of this begs the question, Even if DIV has been successful in differentiating itself from SPHD, is the pocket of the market it is targeting large enough to justify the overhead of the product?
Although there is nearly $60 billion in assets currently invested in global dividend products, just over $70 million currently sits in shares of SPHD. Add that to the fact that DIV costs 15 basis points more than SPHD’s 30 bp annual expense ratio, and it’s hard to see the market for the product.
To my broader point about me-too products, DIV isn’t the only knock-on product trying to ride the coattails of another ETF launch.
My colleague Ugo recently wrote about State Street launching the SPDR Russell 1000 Low Volatility ETF (LGLV) , a fund that attempts to carve out some of the market share enjoyed by the wildly popular PowerShares S'P 500 Low Volatility Portfolio (SPLV). We’ll see if the second product gets any traction, but historically it’s the first movers who enjoy the windfall, while the second-comers struggle to stay afloat.
Investors could very well prove me wrong and pile into DIV hand over fist. Heck, to me it’s much better to start with a total market universe and build from there than to cherry-pick from a flawed S'P 500 stock benchmark.
If you want breadth, DIV is certainly going to provide more of it, and the inclusion of MLPs certainly adds an interesting wrinkle.
The problem is, if history is any guide, investors are unlikely to care.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com .
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