On this week’s episode of ETF Prime, host Nate Geraci is joined by President of ETF Trends and ETF Database, Tom Hendrickson, to discuss thematic ETFs through a unique lens. Geraci also discusses the controversial “payment for order flow” practice with Interactive Brokers’ founder Thomas Peterffy. Later on, Chris Sullivan, President of MacMillan Sullivan Communications, offers a behind-the-scenes look at ETF marketing.
First up is Hendrickson, who discusses the growth of thematic ETFs, one of the hottest market segments in recent years. As he explains, investor engagement with thematic ETFs can shift quickly, which is emblematic of a space dominated by innovation and excitement.
Hendrickson details how assets in the thematic ETF space grew from $40 billion in 2018, with 27 fund launches, to $50 billion in 2019. However, the real explosive adoption for these types of ETFs came in 2020. Nearly $73 billion of net inflows came into the thematic ETF complex. Today, there are about 209 thematic ETF funds, totaling about $160 billion in assets under management.
Popular themes have included technology-based concepts such as robotics and A.I., fintech, genomics, internet stocks, outer space, advanced mobility, low carbon products, and digital economies. These are emerging areas of the market that the investor community can easily gain diversified exposure to through using the ETF wrapper.
Hendrickson also lists the five ETFs that have gotten the most engagement exposure, based on year over year growth, including the Invesco WilderHill Clean Energy ETF (PBW), the VanEck Vector Rare Earth Strategic Metals ETF (REMX), and the Invesco Solar ETF (TAN).
Payment for Order Flow
The next section featured Thomas Peterffy, the Founder and Chairman of Interactive Brokers, who discussed the subject of “payment for order flow.” This term refers to when a broker routes client trades to certain firms, and in return, the brokers are paid for the flow. Concern has arisen as to why companies like Citadel would do this and if this is detrimental to investors.
As major brokerages went commission-free in 2019, many began to wonder how these firms were making money if they weren’t charging for trades.
Many ways, says Peterffy, include paying investors a minimal amount for the cash in their brokerage accounts while the brokers invest it for a higher rate. They can also lend out clients’ securities to short-sellers and cross-sell other proprietary products and services, among other options. Payment for order flow began gaining attention during the GameStop drama, as investors began to wonder if there was a conflict of interest.
Finally, MacMillan Sullivan Communications President Chris Sullivan joins Geraci to discuss his role in the public relations and marketing aspects of the ETF industry. Competition is fierce in the ETF business, and Sullivan breaks down some of the methods and strategies to get eyes on different funds.
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