What Happens When HACK Gets Hacked By Insider

Investors in the PureFunds ISE Cyber Security ETF (HACK) woke up Aug. 1 to find their fund had a new name, ETFMG Prime Cyber Security ETF, and tracks a new index.

a stunning development, the fund’s advisor, ETF Management Group, had rebranded the entire family of PureFunds ETFs with the ETFMG name, and began following indexes from a new firm called Prime Indexes.

Since the change, $36 million has flowed out of HACK, which has $1.1 billion in assets, according to Morningstar Inc. The outflow has coincided with a pullback in cybersecurity stocks and the ETFs that invest in them.

While HACK’s old and new indexes both track the same securities, there were some slight changes in the new index to conform with a new methodology and improve implied liquidity, said Sam Masucci, chief executive of ETF Management Group. The change had little effect on the share price.

The story highlights the issues small asset managers without infrastructure can run into. ETF MG is known as the advisor. It provides the infrastructure for operating the ETF and portfolio management, as well as manages the third-party relationships with outsourced services, such as custodians, legal and auditing. ETF MG has 13 funds on the market.

PureFunds was the sponsor, covering most of the costs. Typically, the sponsor’s role is branding, marketing and consumer education. ETF MG is now the sponsor.

Unlike the ETFs of most small asset managers, when HACK launched in 2014 it was an immediate hit. It quickly gathered $1 billion in assets. Andrew Chanin, Pure Funds’ chief executive, was lauded as an ETF wunderkind. Altogether, PureFunds launched eight funds with ETF MG, six of which will continue under the ETF MG name. The other two were closed in July.

“People come to us with ideas that we turn into ETFs and operate. We are a comprehensive service company,” said Masucci. “Their role is market education. With more than a dozen partners, we’ve only had one that went this direction.”

Masucci said the dispute started in April when the board voted to lower the fund’s expense ratio to 0.6% from 0.75% in order to better compete with First Trust Nasdaq Cybersecurity ETF (CIBR), which charges 0.6%. At the point, HACK had $950 million in assets, while CIBR had $218 million.

“I alerted Andrew, and the Nasdaq and Andrew sued us,” said Masucci. “When Andrew sued us he violated provisions in our agreement precluding him from taking any actions that interfered with the operation of the fund. We would have not terminated them if they had not sued us.”

Masucci also said that Chanin did not originate the idea for the fund. He said that came from Kris Monaco and his team at ETF Ventures, a division of ISE, which was later acquired by Nasdaq. Masucci said Nasdaq disbanded the ETF Ventures team. Monaco, who was instrumental in creating the index that PureFunds ISE Cyber Security tracked, is one of the founders of Prime Indexes, which is providing the new index for the fund.

Chanin disputes the claims by ETF MG. He said PureFunds and ISE were partners and they hired ETF MG, not the other way around. And that it was PureFunds and its partners that helped cover the fund’s expenses.

In the complaint filed in the Superior Court of New Jersey, PureFunds claims that ETF MG was retained to “empower” PureFunds to launch their ETFs. PureFunds alleges that ETF MG “trumped up false securities violations” with the purpose of obtaining control of the PureFunds business to pocket millions in annual revenue. It also alleges that ETF MG reduced the “profit” that PureFunds was to receive from “their ETFs.”

“The pressure on asset managers to reduce their fees is as great as it’s ever been,” said Ben Johnson, Morningstar’s director of global ETFs research. “The vast majority of flows are going into the ones with absolute rock-bottom expense ratios. That’s the trend.”

HACK has risen 10.4% this year, but is down 4.8% in the past three months. CIBR, which was launched in June 2015, is up 8.3% this year, but also down 4.8% the past three months.

CIBR now has $275.6 million in assets.

The two funds have similar top holdings. HACK’s 39 holdings as of Aug. 15 were topped by Cisco Systems at 4.75%, Palo Alto Networks at 4.49% and Symantec at 4.12%. CIBR top holdings were Palo Alto Networks at 6.87%, Cisco Systems at 6.31%, and Akamai Technologies at 6.09%.

The other funds affected by the change, with assets and expense ratios:

• PureFunds ISE Mobile Payments is now ETFMG Prime Mobile Payments ETF (IPAY), with $152 million in assets and an expense ratio of 0.75%.
• PureFunds ISE Junior Silver (Small Cap Miners/Explorers) is now ETFMG Prime Junior Silver ETF (SILJ), with $53.1 million and 0.69%.
• Pure Funds Video Game Tech is now ETFMG Video Game Tech ETF (GAMR), with $29.7 million, 0.75%.
• PureFunds Drone Economy Strategy is now ETFMG Drone Economy Strategy ETF (IFLY), $23.3 million, 0.75%.
• Pure Funds ETFx HealthTech is now ETFMG ETFx HealthTech ETF (IMED), $2.8 million, 0.75%

This was originally published in Investor’s Business Daily.

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WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

White-Labeling Lets Firms Launch ETFs At Low Cost

As the exchange traded fund industry grows, more money managers are jumping on the bandwagon and creating their own ETFs. However, some new entrants are neither large money managers nor mutual fund families. They’re small companies, or just guys with a dollar and a dream of running an ETF.

To help these people achieve their dream, a niche business called white-labeling ETF companies has emerged to build and launch funds for a fraction of what it typically costs.

Creating an ETF “from start to finish, for all the contracts, the average is between $750,000 and $1.25 million, and anything less than that is a gift,” said Bob Tull, an independent financial-product consultant, who has helped develop more than 300 ETFs of all kinds. “That’s the total for exemptive relief, the prospectus and all the contracts.”

But because they already have the infrastructure in place, white-label firms can help a small player bring an ETF to market for about $100,000.

White-labeling, most commonly seen on generic products in supermarkets, is where one company produces a product or service and lets another company put its brand name on it. Thus, the second company looks like it made the product.

The ETF industry consists mostly of huge money managers or mutual fund companies, which built the infrastructure to create and run investment vehicles. But many of these new ETF players have little, if any, of this infrastructure. Instead of spending the money to build it on their own, they’ve outsourced the job to ETF white-labelers.

White-labelers have brought more than 30 funds to the market, and many more are in the works.

“A lot of people don’t want to deal with the daily requirements of maintaining the ETF. That’s what we do for them,” said Sam Masucci, the chief executive officer of Exchange Traded Managers Group, a private-label issuer firm in Summit, N.J., known as ETFMG.

Using Exemptive Relief

More important, the small player gets to use the exemptive relief previously obtained by the white-label firm. In order for an ETF to trade on the stock market, it needs to break a few rules in the regulation that controls mutual funds, the Investment Company Act of 1940.

The ETF firm must apply to the Securities and Exchange Commission for permission to break the rules. This permission is called exemptive relief. Depending on the complexity of the fund, it can take upwards of two years to be awarded.

After a firm receives its exemptive relief for a category of funds, the process to create additional ETFs can take a little as three months.

This concern made PureFunds, an independent ETF research house based in Mendham, N.J., go with a white-label firm instead of filing on his own. PureFunds Chief Executive Officer Andrew Chanin said he had already seen ideas he wanted to launch get scooped up by other firms and hit the market.

“Our big fear was we would file for the fund and it would take too long to approve,” said Chanin. “Being a start-up, if someone beat us to the market, that would be enough to sink the company before we got out of the gate.”

Silver Away

ETFMG helped PureFunds launch the PureFunds ISE Junior Silver ETF (SILJ), which tracks small-cap silver-mining companies. ETFMG helped PureFunds develop and vet the idea and find an index maker to produce the index and methodology requirements.

It then helped write the prospectus and let PureFunds use its exemptive relief. During the time the SEC was reviewing the filing, ETFMG put in place all the third-party agreements with accountants, lawyers, authorized participants and the exchange it would launch on. Now, ETFMG manages the daily operations for the fund.

Meanwhile, PureFunds is responsible for marketing the fund and bringing in assets. Currently, the fund has just $5.6 million in assets under management. But that could soon change. Year to date, the fund is up 26%.

Originally published in Investor’s Business Daily.