From drones to… Daniel? An ETF makes a surprising turn

The change sets out a trifecta of unconventional decisions for investors: the fund will now pursue a hodgepodge thematic approach to investing, charge a premium for branding tied to a lesser-known name, and ask investors to trust their money to a company with known legal woes.

The new ETF tracks an index called the “Dan Ives Global Cloud Technology Prime Index,” and bears the ticker IVES. That’s for Daniel Ives, a long-time Wall Street technology analyst now with Wedbush Securities.

The new fund will focus on companies that are “undercover gems of cloud technology,” according to a press release, which notes that in the next two years, the share of work loads managed in the cloud will increase to 55% from 33%. “The current COVID-19 pandemic is further driving stay at home/remote working applications,” ETFMG said in a statement.

It’s worth noting, however, that the drone technology theme of the old fund might also have benefitted from the coronavirus pandemic, as households try to avoid contact with other humans as much as possible. The decision to remake the ETF predated the pandemic, however.

More to the point, ETFs with narrow themes can be chancy, said Ben Johnson, director of global ETF research at Morningstar, and bundling together a few themes, as IVES does with cloud technology, cyber security, and 5G, doesn’t necessarily help.

The track record of the earlier drone ETF “is emblematic of what we’ve seen in the thematic space. People find a sexy narrative, try to capitalize on it, a lot of money flows in, and then money flows back out,” Johnson told MarketWatch.

“It’s a throw-stuff-against-the-wall-and-see-what-sticks approach,” Johnson said. After being open for nearly four years, IFLY had only attracted about $37 million, according to a December 31 fact sheet.

This pivot isn’t as extreme as the one the ETFMG may be best known for: turning a lagging Latin American real estate fund into a cannabis-themed one MJ, +4.98% .

And it’s not the first ETF to attempt to capitalize on the persona or brand name of an individual, Johnson noted, though some earlier attempts may have had somewhat broader name recognition than Ives does. In 2016, for example, asset manager Mario Gabelli launched the Gabelli Media Mogul fund. There were also efforts to create a music-themed ETF branded after Quincy Jones. “QJ” never came to fruition, Johnson said.

Also worth noting: ETFMG is the company at the heart of a set of lawsuits over fees for a cyber security ETF called HACK. “From our perspective, EFTMG is sub-reputable and a firm that is going to be undergoing some financial hardship as it seeks to meet its obligations with the court case,” Johnson said. “Anybody who’s paying attention sees the writing on the wall and steers clear.”

Related:Time, money and effort… and then your great ETF idea gets ripped off

ETFMG did not immediately respond to a request for comment.

Perhaps most surprising about this step, to Morningstar’s Johnson, is the idea that ETF issuers would continue to tie their investing approach to narrow “idolatry,” in his words, whether of a theme or a figurehead. The ongoing out-performance of broad index funds has rested on “eliminating idiosyncratic risks and not trusting any one individual or team to make smart decisions,” Johnson said.

IVES will charge a management fee of 68 basis points, more than 10 times as much as some of the most popular broad index funds that have beaten narrow-themed, actively-managed funds over the past cycle. Even a more targeted approach like Vanguard’s Information Technology ETF VGT, +8.51% only charges 10 basis points.

A fund like this one may also represent a revenue opportunity for Wedbush at a time when traditional Wall Street business lines like asset management and investment research are also struggling, Johnson pointed out. Wedbush did not respond to a request for comment.

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