ETF Launches in The First Half of 2020: Three Key Trends

Despite the COVID-19 pandemic, there were 130 new ETFs listed in the US in the first half of 2020. While these new ETFs spanned multiple asset classes and strategies, the following three key trends stood out.

1. The growing proliferation of ‘downside buffered’ ETFs

The ‘Buffered’ ETF structure has drawn significant investor interest in the last few months. These ETFs use options to track the returns of an index, but with an upside cap and protection against some downside losses, over a specified outcome period. Innovator Management, the first mover in this space, has a range of buffered ETFs that vary by percentage of losses protected (ranging from 9%-30%), index tracked (S&P 500, Russell 2000 etc.) and month of reset.

There were 26 buffered ETF launches in the first half of 2020, accounting for 20% of all ETF launches in the US in this period. The majority were listed by Innovator Management, with Allianz, TrueShares and First Trust also launching products of this type. The table below summarizes the downside buffered ETF launches in the first half of 2020.

Table 1: Downside buffered ETFs launched in 1H 2020

ETF data source: CFRA’s First Bridge ETF database; As of June 30, 2020

2. The introduction of semi-transparent ETFs

On May 20th of last year the SEC had approved Precidian’s proposed ActiveShares structure i.e. actively managed ETFs that are not subject to transparency in their daily ETF portfolio holdings. The first ever ActiveShares, a pair of growth (FDG) and value (FLV) ETFs from American Century Investments, were listed in March of this year. This was followed by a value ETF (CFCV) listed by Legg Mason In May 2020. In addition, Fidelity launched three ETFs based on its own semi-transparent ETF methodology.

This is an important development in the US ETF industry which, prior to this SEC approval, has always required daily disclosure in ETF constituent holdings for both index linked and active ETFs. Additional ActiveShares launches are anticipated this year, since as of May 28, 2020, fourteen asset managers had licensed the ActiveShares technology. The launch of semi or non-transparent ETFs is unlikely to be limited to the Precidian ActiveShares structure. On July 8, Invesco announced that it was filing with the SEC for an active non-transparent ETF based on Fidelity’s active ETF structure.

To date, the ETF industry has experienced tremendous growth with transparency in daily ETF holdings being one of the underpinnings. It will be interesting to see whether investors also adopt semi or non transparent active ETFs as well.

3. Thematic ETFs for a COVID-19 impacted era

COVID-19 has fundamentally altered the way we live and work, which in turn significantly impacts investing. While the long-term structural impact of COVID-19 is still uncertain, this year has already seen the listing of thematic ETFs that seek to reflect this new investing environment.

• The Direxion Work From Home ETF (WFH) holds companies across four technology segments that stand to benefit from an increasingly flexible work environment. It includes Cloud Technologies, Cybersecurity, Online Project and Document Management, and Remote Communications. The underlying index consists of 40 companies, namely, the top 10 ranked companies in each of the four WFH segments. 

• Although Franklin launched the Franklin Disruptive Commerce ETF (BUYZ) on Feb 25 before the full impact of COVID was clear, this ETF seems well suited to the current environment. It holds companies like Shopify (SHOP), Amazon (AMZN) and Paypal (PYPL) that are expected to substantially benefit from electronic commerce, auctions, the sharing economy and e-payments. As of July 8, 2020, the ETF was up by 22% in the trailing 1 month and 59% since its inception.

• The ETFMG Treatments Testing and Advancements ETF (GERM), launched in June 2020, is designed to track both event-driven news and long-term trends of companies engaged in developing treatments and vaccines, or diagnostic technology, in the fight against infectious diseases.

• Similarly, the Pacer BioThreat Strategy ETF (VIRS) seeks to invest in U.S. listed companies whose products or services help to protect against, endure or recover from biological threats to human health.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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WFH