ETF innovation is always exciting. When we look back at a fund like the SPDR Gold Trust (GLD), which just hit its 20th anniversary in November, it’s hard not to think about how much disruption in access, cost and strategy ETFs have provided over the years.
GLD was the first to put physical gold access in an ETF wrapper back in 2004. It’s today a category leader and an investor darling. Believe it or not, 30-plus-years since the launch of the first ETF in the U.S., one-of-a-kind products are still breaking new ground.
Significant Product Innovation
In 2024, we’ve seen a lot of product innovation and some interesting new ideas come to market. One set of funds that recently launched, the FIRE Funds, sits at a frontier of sorts for the ETF market.
FIRE ETFs were created by Tidal Financial Group to match — or to meet — the worldview of the FIRE Movement (which stands for Financial Independence, Retire Early). They are built for a group of do-it-yourselfers that’s focused on creating financial freedom.
As a demographic, FIRE enthusiasts aren’t talking about finance as much as they are talking about lifestyle, as Michael Venuto, CIO at Tidal Financial Group, puts it. They aren’t chasing market outperformance or thematic opportunities as much as they are chasing their ability to spend time on things they value most.
“They start with extreme savings,” Venuto said. “To a lot of us, savings means giving up stuff. To them, it means saving money for what they care about the most. They think about time, not money.”
Solving for a Specific Objective
My colleague, Nick Wodeshick, covered the launch of these products back in November, highlighting details of the two strategies, the FIRE Funds Wealth Builder ETF (FIRS) and the FIRE Funds Income Target ETF (FIRI). Each fund tries to solve for a specific objective. FIRS is designed around the concept of savings, holding things like bonds, stocks, managed futures and bitcoin as paths to building wealth long-term. FIRI is for income, so the portfolio owns bonds, options-based income, gold, bitcoin and oil.
What both of these funds have in common is the underlying pursuit of diversification. According to Venuto, the FIRE crowd isn’t really focused on the importance of diversification given recent market strength. On the contrary, they work hard to keep it simple, he says, and ascribe to a “just own VTI and chill” approach.
“VTI and chill” may have worked beautifully in a market with strong large cap leadership, but diversification could offer resilience to a portfolio across different market environments. In the context of the FIRE community’s pursuit of financial freedom, the idea is that by expanding beyond “VTI and chill”, investors may mitigate the risk of having to delay their “retire early” goal if the market takes a turn.
In a simple way, these ETFs open an educational door about the benefits of diversification to a demographic that’s keen on keeping things simple.
As we think of new breakthroughs, there are two ways in which the FIRE ETFs innovate.
Investor-Centered Innovation
Both ETFs are built as fund-of-funds — they each achieve their exposures through other ETFs — so they are essentially an entire ETF model in a single ETF ticker.
These model-like ETFs are investing in ETFs from multiple providers. They may almost all be on the Tidal platform. But they represent expertise from various asset managers and subadvisors across the industry. ETFs outside the Tidal platform can also make the cut for exposures that don’t yet exist in-house. Examples include gold and taxable municipal bonds. All that’s to say that the FIRE ETFs are diversified across assets and across managers and expertise.
These all-in-one single-ticker solutions bring the diversification conversation to the do-it-yourself FIRE community. That’s because they are designed around the same principle of financial freedom. They are even branded accordingly. And, perhaps more importantly, these ETFs target an investor demographic that most ETF issuers overlook. To quote Venuto, the DIY crowd isn’t circulating in the same advisory circles and media channels many of us in the industry are. They are talking about financial freedom on Reddit. They are on Instagram. And they are on Youtube.
The FIRE ETFs are an access innovation, bringing easy-to-implement diversification to a unique community investing on their own.
Industry-Centered Innovation
The other innovation here is that these ETFs are an interesting distribution play.
Any ETF issuer will say that distribution is a challenge. Smaller issuers, in particular, will tell the tall tales of distribution hurdles. It’s not easy to create traction for an ETF. As a white label platform, Tidal knows this first hand. Many of its ETF clients may have best-in-class ETF ideas. Breaking through the noise and finding that investor base, however, is no small task.
The FIRE ETFs are model portfolios comprising Tidal-platform ETFs (primarily.) They are essentially opening a new distribution channel for each of the underlying funds, at no additional cost to the issuer-client and at no additional cost to the end investor. Tidal isn’t charging its ETF clients to be added to the model. Likewise, it isn’t charging a management fee for these ETFs to the end investor. Investors only pay the acquired funds fees associated with the underlying strategies.
It’s a win-win for everyone involved.
What’s more? The FIRE portfolios aren’t being offered only as ETFs. They can also be accessed as separately managed accounts (SMAs). No one expects the FIRE community to be looking for SMAs — that’s just not their speed. But advisors may. By packaging these strategies as ETFs and SMAs, Tidal broadens the potential distribution reach of each of its underlying client ETFs.
Will It All Work?
With product innovation, it’s not always immediately obvious whether a new idea will resonate and succeed in the long term. The FIRE ETFs (and SMAs) are no different. They are testing new waters, and we will eventually find out if they are warm or cold.
But on arrival, it’s exciting to see how innovative these strategies are by reaching a new investor demographic for ETFs, educating about diversification, and paving a new path to distribution for white label providers and their clients. As far as innovation goes, these are indeed interesting products. We’ll be watching what happens next.
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