On this week’s episode of ETF Prime, Todd Rosenbluth, head of research at VettaFi, discusses recent developments and innovation in ETF offerings. Later, Bob Elliott, co-founder and CEO of Unlimited, shares insights on hedge fund replication ETFs.

ETF Innovation & Market Trends

Rosenbluth provided an in-depth look into several significant developments within the ETF industry. He began by discussing Invesco’s initiative to convert the Invesco QQQ ETF from a unit investment trust (UIT) to an open-ended fund. This conversion, if approved by shareholders, would bring several benefits, including dividend reinvestment, securities lending, more frequent disclosure, and a lower expense ratio, dropping from 20 to 18 basis points.

Rosenbluth and Geraci highlighted that while QQQ is one of the world’s largest ETFs, it’s not a significant profit-maker for Invesco. Most of the 20 basis point fee goes to Nasdaq for licensing and Bank of New York Mellon as trustee, with the remainder allocated to marketing due to the trust’s prospectus. The conversion would offer Invesco greater flexibility in how these funds are used.

See more: QQQ Is Ready for Modern Makeover

When questioned about the potential coexistence of QQQ and the Invesco NASDAQ 100 ETF (QQQM), Rosenbluth believes both funds will continue to operate successfully, catering to different investor bases. QQQM, with $55 billion in assets, attracts a more retail “buy and hold” audience, Rosenbluth said, while QQQ, at $360 billion, is used more for shorter-term purposes due to its greater liquidity.

Despite Broader Call for Diversification, Concentrated ETFs Enter Market

Rosenbluth also offers insight into Global X’s new suite of PureCap ETFs. The suite, launched last week, provides concentrated exposure to specific market sectors. These ETFs navigate regulatory rules (known as the RIC rule) that typically limit a single company’s weighting to 25% by creatively using other ETFs (like leveraged ETFs or even other sector ETFs) to maintain desired exposure levels, Rosenbluth said.

Despite current market trends favoring diversification, Rosenbluth sees these concentrated ETFs as beneficial for advisors or institutional investors looking to overweight specific sectors and maintain high stock-level exposure that reflects true market capitalization.

Additionally, Rosenbluth looks at State Street’s filings for covered call sector ETFs, an interesting innovation for sectors that typically offer lower income potential. There has been strong, continued investor demand for derivative income products, despite initial skepticism about the category being a bubble.

Bob Elliott on Hedge Fund Replication ETFs

Bob Elliott, co-founder and CEO of Unlimited, discussed the firm’s approach to disrupting the traditional hedge fund space by creating low-cost replications of hedge-fund-style investments through ETFs.

Unlimited currently offers four ETFs focused on hedge fund replication strategies: the Unlimited HFMF Managed Futures ETF (HFMF), the Unlimited HFEQ Equity Long/Short ETF (HFEQ), the Unlimited HFGM Global Macro ETF (HFGM), and the Unlimited HFND Multi-Strategy Return Tracker ETF (HFND).

The primary opportunity in hedge fund replication lies in providing diversified, low-cost, and liquid products to investors seeking alternatives to traditional 60/40 portfolios, Elliott said. He emphasized that while traditional hedge funds often come with high fees (sometimes as high as 400 basis points annually) and illiquidity, their risk-adjusted returns before fees are often quite good.

Unlimited aims to address these issues by targeting equity-indexlike risk and charging a significantly lower management fee of 95 basis points. The firm uses proprietary machine learning to infer hedge fund positioning by analyzing returns, allowing them to replicate strategies without the high costs associated with traditional managers.