ETF Superpower in the making
Ben Fulton is one of the pioneers of the ETF industry. He began his ETF career in 1997 and is best known for his nine years with PowerShares, the last four being Global Head of ETFs for Invesco. Ben then ran the ProShares Tactical ETF business for several years. He remains active in ETFs by dividing his time between his work as Managing Director of AXS Investments, where he helps identify ETF-related and index-related investment firms to develop, sell or buy, and as a CEO of Elkhorn Consulting, where he provides advice to companies. seeking to work with ETF sponsors as an index provider, provider or media provider.
After a weekend of celebrating America’s freedom, I thought of a Bloomberg Intelligence article I read last week. Written by my friend in the industry Eric Balchunas, Senior ETF Analyst at Bloomberg, “The Potential of State Street ETFs with Invesco” explores the idea that these companies are joining forces to create a new superpowered ETF company.
Enjoy the read, but I’ll take my own twist on this concept.
Leading the smart ETF revolution
I spent almost a decade on the top management of a tiny new ETF called PowerShares (some call it Invesco, but not me; the real key to this business has always been leading the ETF revolution! ).
So, in my hypothetical ETF merger scenario, Invesco would buy the State Street ETF business, and not the entire company in such a merger. This makes sense, much like the United States acquired the Louisiana Purchase in 1803 from the previous French superpower, or the ETF equivalent of State Street.
Back then, PowerShares had a flawless earning culture. Bruce Bond has created a business that is both fearless and willing to go where no one has gone before. At the start of PowerShares, we were laughed at because we focused on the retail advisor rather than the institutions. This was where State Street and BGI (now iShares) focused instead.
Acquisition of key ETFs
State Street saw its initial success by acquiring their PDR ETF sponsorship from the American Stock Exchange.
The assets were the SPDR S&P 500 ETF Trust (SPY), SPDR S&P Midcap 400 ETF Trust (MDY) and SPDR Dow Jones Industrial Average ETF Trust (DIA), and over time they added in the SPDRS sector and the SPDR Gold Trust (GLD).
Likewise, PowerShares bought QQQ from Nasdaq. Most of these ETFs used a now obsolete structure known as a Listed Collective Investment Company (ITU) as their investment infrastructure. It was a great structure for a stock exchange to use to increase trading in their stocks – both the ETF and its underlying – but a lousy structure to be profitable for the sponsor.
PowerShares bought the Invesco Trust QQQ (QQQ) both to strengthen our assets under management and to have the brand budget that has been incorporated into the expenditure of the listed ITU. Today, I would assume that QQQ’s marketing budget alone, dictated by the structure of the fund, would be well over $ 30 million per year.
I can only imagine the amount of marketing dollars with SPY, MDY and DIA, the other major UITs listed that would theoretically be merged. That would represent over $ 100 million in annual marketing dollars.
Future industry consolidation
The ETF world is reaching an interesting point of maturity.
We now have over 150 ETF issuers, of which around 30 are very profitable and able to focus on long-term planning.
My thoughts have been that the other 120 sponsors would be the fuel for ETF Meger Mania on hold, but maybe it starts with some of the leaders joining forces first? (See: ETF.com issuer ranking table)
The goal of the Big 10 ETF Firms (I grew up in Ohio, so you always start and end with the Big 10) is to be able to steal market share from BlackRock or Vanguard. This is difficult, unless you have one of these three virtues:
Really new products (ProShares and ARK)
Proprietary distribution (Schwab and JP Morgan)
In-depth relationship with advisors (First Trust). One could argue about low-cost products, but that title only belongs to one of the leaders, Vanguard. Other companies wouldn’t venture in this direction unless they didn’t care about profitability or providing the necessary support that non-beta products need.
Transmitters must adapt or die
I still think the 120 smaller companies will have to find partners for distribution, infrastructure or capital. These are not the reasons why an ETF merger of Invesco and SSGA would make sense.
The combination of these two companies would elevate what I call “SuperPowerShares” to compete with the Big 2 in terms of product, distribution, global presence, and exposure to non-ETF-affected people around the world – the “ETF missionaries” we might call them.
One of the original concepts of the inventors of ETFs was that they could be traded globally due to their trading on the stock exchange. Perhaps it could now be accomplished, with BlackRock and SuperPowerShares competing against each other on a global scale.
Complement rather than compete
Invesco and SSGA have a very complementary product line, with many of the most traded single tickers in the ETF field – SPY, QQQ, GLD, Sector SPDR, MDY and DIA, to name a few, and a very impressive range of smart beta, fixed income and commodities.
The merged company is said to have the widest range of ETF products in the world. The distribution would be significantly improved and you could argue that only BlackRock and SuperPowerShares would be the only big box ETF retailer. One-stop shopping here means you don’t want a beta; there are plenty of smart beta ETFs to choose from.
Additionally, the combination would benefit from partnerships with Research Affiliates, Dorsey Wright, S&P Factor Family, and BulletShares, which in turn would improve huge Big Beta ETFs like SPY, MDY, DIA, and Sector SPDR – and don’t forget QQQ.
With the continued explosive growth of ETF industry assets, companies will need as many buckets as possible and in every known location, in order to maximize the amount of rain or money captured. It would do the trick.
Invesco’s buying culture for growth
Finally, and probably understood correctly, Invesco likes to buy instead of building distribution to fuel growth in assets under management. Oppenheimer, Guggenheim ETFs, Van Kampen and PowerShares are examples of the buy-on-build approach.
Invesco’s share price has gone from single digits to nearly $ 30 per share over the past two years. Thus, its currency, the shares of the company (IVZ), is worth three times what it was two years ago.
It is certainly better than holding cash. I would say their market cap is still small considering the product line they have, and if you add SSGA ETFs I think the valuation would be like BlackRock’s.
Invesco’s PER ratio is currently close to 17, while BlackRock enjoys a PER of over 25, which is almost 50% more! That should make it affordable, and I think the street would love the merger. Personally, I would like to keep my IVZ stock if this is the case.
Perhaps the icing on the cake is that State Street could focus on what it does well, and the SSGA ETF team would be free to grow with Invesco, a win-win solution for all parties. concerned.
Ben Fulton can be reached at [email protected]
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