Market Absurdity Squared: There Is Now An ETF ETF

Tyler Durden's picture

By now everyone is familiar with the charts showing the tremendous growth of passive investing in general, and ETFs in particular, shown most recently in our discussion of how ETFs make markets dumber.

 

To be sure, everyone is also quite familiar with the mutant permutations of the above assets, such as inverse and 2x or 3x levered ETFs, whose only function is to fleece retail investors with unprecedented theta, including ETFs on VIX, essentially making them the modern day equivalent of Synthetic CDOs so familiar from the peak of the last financial crisis.

Yet while the exponential growth in ETF AUM continues, a landmark event took place yesterday, one which, at least according to Bank of America, may signal that we have hit a top.

The bank points out that after $2.9 trillion of inflows to passive funds, and $1.3 trillion redemptions from active funds past 10 years, an ETF ETF has launched.

 That's right: the ETF Industry Exposure & Financial Services ETF (NYSE Arca: TETF) began trading overnight, composed of stocks of the companies driving the growth of the Exchange Traded Funds industry.

And since ETFs are effectively derivative products, something which will become abundantly clear when the liquidity mismatch chasm is exposed following the next violent market selloff, any similarity between ETF ETFs and CDO-squareds - whether synthetic or otherwise - which marked the top of the last credit bubble, is surely purely accidental.

So what is the ETF ETF, or TETF? Here is the explanation from the press release:

ETF Industry Exposure & Financial Services ETF (TETF) Launches April 20th, Providing Access to Full Range of Companies Driving ETF Industry Growth

The ETF Industry Exposure & Financial Services ETF (NYSE Arca: TETF), will begin trading today, April 20, 2017, providing investors with a single point of access to the companies driving and participating in the growth of the Exchange Traded Funds industry.

ETF will seek to track, before fees and expenses, the price and yield performance of the Toroso ETF Industry Index (the 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.

ETFs and the industry have experienced significant growth over the past five years, as their assets have grown in the U.S. from $1.2 trillion to $2.7 trillion; the number of U.S. ETF sponsors has increased from 45 to 78; and the average ownership of U.S. equities by ETFs has more than tripled. 1

The Index is overseen by an Index Committee made up of industry veterans, including Mike Venuto, CIO of Toroso Investments; Guillermo Trias, CEO of Toroso Investments; Linda Zhang, Founder of Purview Investments; Kris Monaco, Founder of Level ETF Ventures; and Kevin Carter, Founder of Big Tree Capital. This group has decades of ETF industry experience covering a range of functions including index creation, ETF portfolio construction, investment management, distribution, research, trading and more.

“Not only are we seeking to capture the performance of the industry, but we’re also looking to bring together many of its leaders to leverage their authority as we monitor, research, and benchmark the category’s potential future growth,” said Trias, who created the concept and the idea behind the ETF.

“We have deep roots in the ETF ecosystem and have created an Index that captures the dynamism of ETFs and the disruptive innovation they have brought to the financial services industry,” said Venuto.

“Clearly, investors and advisors now understand the benefits of the ETF structure, including improved liquidity, tax efficiency, and increased transparency. But while they’ve been able to incorporate those benefits into their portfolios, they have not had opportunities to participate in the growth of the ETF industry itself. That is an issue we’ve solved with the launch of the Toroso ETF Industry Index and TETF,” Venuto said.

The Index, maintained by Solactive AG, is designed with four tiers of constituents:

  • Tier 1, 50% of the Index’s exposure, is made up of companies with substantial participation in the ETF industry, providing direct financial impact to shareholders, including BlackRock, Charles Schwab, Invesco, State Street, WisdomTree, and more.
  • Tier 2, 25% of the index’s exposure, is made up of companies with substantial participation in the ETF industry, providing indirect financial impact to shareholders, including KCG Holdings, NASDAQ, Intercontinental Exchange, Inc., and more.
  • Tier 3, 15% of the Index’s exposure, is made up of those companies with moderate levels of participation in industry, including Bank of New York Mellon, US Bancorp, FactSet, Ameriprise Financial, and more.
  • Tier 4, approximately 10% of the Index’s exposure, includes companies that are new or participating in a smaller way in the ETF industry relative to their overall focus, and includes such names as Morningstar, Eaton Vance, Goldman Sachs, Legg Mason, Citigroup, and more.

“The ETF industry is more than just a list of fund sponsors, and this Index is designed to include the full range of participants,” continued Venuto. “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 the industry itself.”

The Toroso ETF Industry Index has been licensed to Exchange Traded Concepts, the advisor to TETF. The fund begins trading on April 20th on the NYSE and will be the first ETF to provide this type of targeted exposure to the universe of companies participating in the growth of the Exchange Traded Fund category.

* * *

So is this all becoming just a little too self-reflexive? And how long until liquidity problems force the creation of an ETF ETF ETF, and so on ad absudrium?  For the answer keep an eye on the assets contained in TETF: if it took sees a surge in assets under management, the current generation's CDO2 will be officially born.

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RagaMuffin's picture

Too bad the symbol isn't  <TITSUP>

Looney's picture

 

Ain’t it hilarious – ETF is an acronym for End The Fed!  ;-)

Looney

adr's picture

I remember a few years ago when the ETFs first started to gain traction.

They were described as ways to make money off the performance of stocks without having to own or have exposure to the volatility of the individual investments. A mutual fund that doesn't own anything.

It made no fucking sense other than to have another synthetic product for firms to scam money.

Automatic Choke's picture

ETF of ETFs.....what a great idea.  Will I be able to buy call options on this?

ebworthen's picture

2XETFDDS = ETF double default swap.

Mr. Bones's picture

ETFception.

We need to go deeper.

 

Raffie's picture

Will still need a ETF to over see the ETF that is over the base ETF.

ETF! To infinity and beyond!

buzzsaw99's picture

ETF will seek to track, before fees and expenses, the price and yield performance of...

now the boj can pay 2X fees. #WINNING!

alfredhorg's picture

I do better not paying for financial advice.

 

https://www.blogger.com/profile/16939035557724737703 >:

"I prove in this blog the performance of my investments since 2006 when I stopped paying for financial advice.  You can see here screenshots showing the dates and amounts of ALL deposits to all seven brokerage accounts under my control, and all seven balances current as of my latest post to this blog."

JBilyj's picture

Buy puts to this etf to hedge or insure your portfolio if its got massive exposure to etfs..

cossack55's picture

Your idea sounds silly enough that it may be genius

Seasmoke's picture

USD back over 100. On its way to WW3.

yogibear's picture

With the Central banks pouring $200 billion/month into markets and economy expect more crazy things. Price discovery is not allowed.

buzzsaw99's picture

funds of funds is part of what caused the great depression. they all owned the same shit so diversification wasn't a problem. lulz. couldn't happen these days with the central bankers setting the price of everything.

symtex411's picture

One has to wonder if the stock underlaying the ETF are actually worth what people think they're worth? And what happens if enough lose value...

buzzsaw99's picture

there's a difference between money macks and eating macks. most of those you refer to are the former.

http://www.zerohedge.com/news/2017-03-06/prisoners-explain-why-pack-mack...

1.21 jigawatts's picture

An IOU for an IOU.  How Jewy.

adr's picture

In Jewy there is no IOU there is only the YOM.

YOU OWE ME

roisaber's picture

Fractal retardation.

Iconoclast421's picture

The VIX ETFs are pretty retarded also. Actually all those types of ETFs are dumb. Why not just trade SPY options? You get a much deeper pool of liquidity and even larger potential gains/losses. The thing about options is you can choose exactly what time value and leverage ratio you want. 

adr's picture

Why don't they just start funds with guaranteed 20%, 40%, and 60% yearly appreciation. The investor gets to choose the rate of their returns with no risk. Some people might be happy with making just 20%, while others prefer to make 60%.

It's just so simple and gets rid of all this risk crap that stops people from actively investing.

And to think, with these great returns, almost everyone will become an investor giving the firms that offer these funds a nearly limitless supply of customers and money to play with.

What could possibly go wrong?

Honestly, the above scenario is what brokerages promise with ETFs and stocks. Forever appreciating returns with near zero risk. The entire system has zero reason to exist.

We've gone full retard times Idiocracy squared.

Catullus's picture

Yeah. They used to be called bonds. And they had counterparty risk.

Now there are no more bonds. Just collateral to leverage off of.

economessed's picture

Financial innovation proves once again that just because you CAN create something, doesn't mean you SHOULD create something.  In every case, financial innovation has one common trait:  the further erosion of the value of money.

NeedtoSecede's picture

Saw this headline, and signed in just to see the comments (and common sense).   I have made some poor investment choiced before, but even I can see how retarded this shit is...  Full speed ahead-over the cliff!

thatthingcanfly's picture

So, second derivative investing?

Pasadena Phil's picture

Is there an associated triple short ETF available too?

Global Douche's picture

EXACTLY my thinking, too! a 3x reverse of this bullshit being released now may have impeccable timing. I'm curious what bait these Black Swans love the most, and there are so damned many circling but the ESF & TPTB won't allow such a hunting season to cull their numbers as it would of course affect (fill in the blank, it's truly that easy).

It may take but one landing on the lake to trigger the Easy Peasy Jackpot.

Catullus's picture

How is it not Doubling up on management fees when an ETF buys another ETF?

Am I missing something? This looks like total fucking bullshit

Making Merica Great Again's picture

CDO of a CDO!

 

That's crazy! No it's fucking awesome!

Silver Savior's picture

For some strange reason I am not surprised. It goes with everything else these days. Everything is sick. Fuck this paradigm.

fishwharf's picture

At least the sly bastards have a sense of humor, launching their financial halucinagen on 4/20.

DavidC's picture

"...any similarity between ETF ETFs and CDO-squareds - whether synthetic or otherwise - which marked the top of the last credit bubble, is surely purely accidental".

Yup. Precisely.

DavidC

atomp's picture

Just one ETF ETF? Wake me up when there are a few hundred.

Raging Debate's picture

Quad stacking. My opinion of Greesnpan was to quad stack to breach the other side in technologies. Jump the cliff and hope your not Thelma and Louise. I admit, I may have followed the same path if I was him. But it had partial success so he shares a big part of blame for our lost decades. 

Fake Trump's picture

Why not? There is a president president.

Global Douche's picture

And he works for the Deep State and MIC.

Fevr's picture

Yawn. A Couple years ago my friend got a financial adviser who put him in a bunch of mutual funds, despite my warning. He has seen the light now. I checked out the holdings of the mutual funds and one of them was just full of ETFs!