It was only a matter of time before someone created an ETF to track the ETF industry. With last Thursday’s introduction of the ETF Industry Exposure & Financial Services ETF (TETF), that time has come. The event prompted multiple reactions, including “what took them so long?”, “are there really enough ETF stocks for an index?”, and “isn’t this just another gimmick ETF?”

The ETF Industry Exposure & Financial Services ETF (TETF) describes itself as providing access to the companies driving and participating in the growth of the exchange-traded funds industry. TETF will seek to track, before fees and expenses, the price and yield performance of the Toroso ETF Industry Index, which is designed to provide exposure to the publicly traded companies that derive revenue from the ETF industry. This includes ETF sponsors, index and data companies, trading and custody providers, liquidity providers, and exchanges.

What took them so long? Well, for starters, there is only one “pure play” publicly traded company in the ETF space—WisdomTree Investments (WETF). The firm launched its first ETF in June 2006, and ETFs are its only business. WisdomTree currently has 88 U.S.-listed ETFs with about $42 billion in assets under management, and it is starting to venture into foreign markets where it manages another $1.3 billion.

So yes, it would appear there are not enough pure play stocks to create an index, but there are enough companies with substantial stakes in the ETF space to create an index of the growing industry. The Toroso Index Committee had the foresight to recognize and accommodate both this somewhat limited current state of the industry as well as the unknown evolutionary path that lies ahead. For these reasons, it uses a tiered methodology that can dynamically shift toward the companies with the most ETF-related revenue in the future. TETF intends to evolve along with the ETF industry.

TETF’s underlying index breaks down the ETF ecosystem into the following subindustries and index allocations:

• 49% ETF sponsors: Although there is only one pure play ETF sponsor, 74% of U.S. ETF sponsor revenue is captured by publicly traded companies.
• 16% exchanges: The “E” in ETF—they facilitate the listing, trading, and may also provide data, research, and indexing services.
• 15% index/data providers: Providing the data to calculate, research, and disseminate date for product creation and price discovery.
• 12% service providers: Custodians, distributors, and trading platforms.
• 8% liquidity providers: Market makers that facilitate the creation and redemption mechanism, a key ingredient of what makes an ETF an ETF.

The Index places companies into tiers according to the significance of their revenue exposure to the ETF industry. It currently has 37 constituents in four tiers. The top tier is composed of companies whose ETF industry participation is substantial and results in direct financial impact to shareholders. This tier receives a 50% allocation and currently has eight stocks receiving nominal weightings of 6.25% each. It consists of BlackRock (BLK), CBOE Holdings (CBOE), Invesco (IVZ), MSCI (MSCI), S&P Global (SPGI), Schwab (SCHW), State Street (STT), and WisdomTree Investments (WETF).

The second tier is composed of companies whose industry participation is substantial and results in indirect financial impact to shareholders. It receives a 25% allocation and currently has seven stocks receiving 3.6% nominal weightings. This tier consists of DST Systems (DST), Intercontinental Exchange (ICE), JPMorgan Chase (JPM), KCG Holdings (KCG), Nasdaq OMX Group (NDAQ), SEI Investments Company (SEIC), and Virtu Financial (VIRT).

The third tier is composed of companies whose industry participation is moderate and results in indirect financial impact to shareholders. It receives a 15% allocation and currently has seven stocks receiving nominal weightings of 2.1% each. It consists of Ameriprise Financial (AMP), Bank of New York Mellon (BK), CME Group (CME), FactSet Research Systems (FDS), Northern Trust (NTRS), US Bancorp (USB), and Virtus Investments Partners (VRTS).

The lower tier is composed of companies that recently entered the ETF space or whose industry participation is minor and results in indirect financial impact to shareholders. It receives a 10% allocation and currently consists of 15 stocks with nominal weightings of about 0.7% each.

TETF will rebalance its holdings every six months and carries an expense ratio of 0.64%. Yield data is unknown at this time, but it will make distributions only once a year. Additional information is located on the TETF website.

Exchange Traded Concepts, LLC, is the investment advisor to the fund and serves as its sponsor, Penserra Capital Management LLC is the subadvisor responsible for fund management, and Toroso Investments, LLC, is the index provider.

Mike Venuto of Toroso Investments said, “The ETF industry is more than just a list of fund sponsors, and this Index is designed to include the full range of participants. It is also aimed toward capturing not only the established leaders in each area, but also those firms that might be new to the space but which are bringing exciting approaches that could resonate with investors and drive further growth of industry itself.”

To finish answering the questions posed in the opening paragraph, I would like to state that my opinion is no, this is not another gimmick ETF. It is a much-needed ETF tracking a viable and growing industry. Some analysts might attempt to label it a thematic ETF, but I would disagree with that assessment also. Themes cut across multiple sectors, but the companies in TETF all belong to the Financials sector, which consists of many industries. It will be classified as a smart-beta ETF belonging to the Financials category in the ETF Field Guide.