ETF "Shark Tank"
Taking his cue from the show “Shark Tank,” Geraci asked the folks on Fintwit to pitch ETFs they wish existed (no spot bitcoin ETFs allowed). He then asked Nadig his thoughts on these theoretical and proposed ETFs.
The first idea Geraci flagged was city or state ETFs. These would be ETFs that own public companies in, say, Pennsylvania, Maine, Minnesota, or even Chicago or Boston.
Nadig thought this was “a great idea” for the “classes of investors for whom… it might be a mandated idea.” This investor class could include state pension plans or endowments with mandates to allocate a portion of their portfolios to state-domiciled enterprises. There are, however, challenges.
“The biggest one is you’re limiting yourself to a narrow pool of investments,” Nadig said. “Companies that might be large employers in a state aren’t necessarily domiciled there.”
If investors are looking to keep money in their locality, it can be “quite tricky” to define domicile and headquarters.
“I think there’s problems with implementation here,” Nadig said. “From an investment perspective, this doesn’t actually make any sense unless you have some sort of mandate.”
The Big Use Case for Direct Indexing
The next idea presented was an S&P 499 ETF that would “exclude the car company” that both Geraci and Nadig assumed was Tesla.
Ultimately, Nadig thought an S&P 499 fund was an “interesting idea, a genuine investment need, but probably the wrong wrapper.”
“This is the great use case for direct indexing,” Nadig said. “This is basically what direct indexing solves for most people.”
Nadig had heard this idea before. It’s usually brought up when an ultra-high-net-worth investor “who has massive exposure to a single company” doesn’t want to buy more of that stock.
“So, this minus-one” idea “is usually highly personalized for a very specific tax and exposure reason. And for that reason, that’s why direct indexing shows up and makes that an easy solve.”
Nadig didn’t think there was much of a market for an ETF where everyone all agrees which stock to kick out of the S&P 500. “It’s too idiosyncratic,” he said, adding that it would make more sense to short the unwanted stock. But that can pose a problem.
“If you’re the CEO of XYZ, you probably don’t want to have to file that you’ve shorted XYZ. That would be bad,” he said. “So, that’s why direct indexing gets you out of jail free on this thing.”
Creative Prospective ETFs
Geraci then went down a list of what he described as “fun or creative prospective ETFs” that Fintwit pitched. The first one was an ETF of stocks of companies that have stadiums named after them. Nadig was unimpressed.
“Isn’t this basically FANZ?” he asked, referring to the shuttered ProSports Sponsors ETF (FANZ). “I think we already got that one. I don’t think it’s been particularly a barn burner.”
Bloomberg’s Eric Balchunas suggested “Animal Shares,” which would be a series of highly concentrated active ETFs based on random selection conducted by different types of animals. Investors could get access to a livestream of animals selecting the stocks.
“The octopus is trading! The octopus is trading! Quick!” Nadig said, laughing.
While Nadig loved the name of the company, he conceded that “nobody’s going ever to buy these products.” But this is something that could actually make a lot of hay as a marketer for something else. For example, someone could livestream a puppy pen or an octopus tank to advertise, say, thinkorswim.
Another idea pitched was an ETF with the ticker symbol JEDI, which would hold companies that perform well in resistance to an alien invasion.
“If we’re actually looking at an alien invasion, just buy everything, because what’s the alternative?” Nadig said. “I’m not sure I can figure out which sector of the economy you think is going to perform well during an alien invasion. Except, I don’t know, maybe media companies?”
An Adult Conversation
Another idea was an adult toy or entertainment ETF (for which he did not provide the proposed ticker symbols). But this pitch led Geraci to ask Nadig how many ideas are dead on arrival because their investment universe is too small.
“I have a pretty good knowledge of common tickers,” Nadig said. “I can’t name a publicly traded adult entertainment company.”
Nadig explained that if there are a handful of adult entertainment companies out there, he suspects “they’re quite small-cap and probably not well-known, highly traded names.” Like the proposed adult toy fund, many of these niche ideas end up boiling down to just 10 or 11 stocks.
“I don’t think there’s a hard and fast number, but if you’re really counting the number of potential targets for your investment on two hands, I think that’s too few hands,” Nadig said.
Too Narrow a Niche
Ultimately, Nadig said that “in many cases,” most of these ideas “are pretty narrow niches.” And that means marketing niche products is a challenge.
“If you’re one guy with an idea, how much can you really get that word out?” Nadig asked. “How big do you think that fund can get, and therefore how much marketing would you spend against it as an issuer?”
An issuer will “count on the word of mouth of it being a unique niche product that people think is clever,” Nadig said. “They’re not going to take out CNBC ads.”
Nadig added that these niche products “can be successful if they have an organic, earned media hook. But as soon as you start spending millions of dollars getting the word out, you’re probably just digging yourself a hole.”
Headline responsivity is the test that Nadig uses on niche products. “Does this idea respond in a predictable fashion to certain kinds of narratives? That’s where we end up with most thematic ETFs,” he said. The ROBO Global Robotics & Automation Index ETF (ROBO) responding to headlines about AI in a predictable fashion is a good example of this.
“If you’re in such a narrow niche that either the headlines don’t matter or the securities don’t move with the headlines… you don’t really have a viable idea,” Nadig said.