When people think of the ETF industry, they mostly think of the asset management, or the sponsor side. However, the ETF ecosystem, which makes up the TETF.Index, is made up of 5 sub-sectors. In this TETF.Index analysis, we highlight how these various, diverse businesses, as stocks, have complemented each other during the last few quarters.
The “beautiful thing” about the ETF industry is how the ecosystem provides diversification in a narrow market sector that has shown solid historical growth and is now showing signs of how sticky it can be. Let’s face it – once an investor or client buys into the ETF benefits of low cost, transparency, and paying less to Uncle Sam, the investor is less likely to want to give up these benefits. It is for this reason that we expect the ETF industry to continue to grow and these businesses to prosper.
How have the different sub-sectors performed within the ETF Industry?
We have now had a live index track record of 15 months, and it’s time to start breaking down the different components and review how they have performed.
- The Toroso ETF Industry Index outperformed the S&P Financial Select Sector Index in each of the 5 full quarters since the inception of the TETF.Index. This includes a 9.1% outperformance in Q1 ’18 and a total outperformance of 17.7% in those 5 full quarters.
- Surprisingly, the Sponsors sector did not fare so well. An equally weighted basket of stocks of publicly traded Sponsors has underperformed both the S&P Financial Select Sector Index & the S&P 500 Index, returning 10.1% over 15 months vs 14.3% and 17.9% respectively.
- Sponsors have been the worst performers in the last two quarters and the second worst in one other quarter
- Liquidity Providers provide diversification. When volatility spiked in Q1 ’18 the Liquidity Providers returned 33.3% as a counterbalance to the drag of Sponsors.
- Looking at weekly correlation numbers, Liquidity Providers had a 0.4% correlation to the S&P Financial Select Index, and a -0.3% correlation to the S&P 500 Index.
- All sub-sectors have weekly correlations of 70% or less, with the one exception being an 88% correlation between Sponsors and Service Provers.
So what conclusions can be drawn?
The ETF industry is made up of an ecosystem of great businesses whose growth and business models are highly scalable, adaptive, and reflective of capital markets. The ETF industry and, therefore the TETF Index, reflects change and a culture that is about financial services and technology. Fund flows are merely an outgrowth of the stickiness of the ecosystem and investors sentiment. As value propositions go, the best metrics of the success of the industry is in how the ETF industry evolves in providing great returns to its investors and shareholders.
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