Is Sheryl Crow to blame for the NETS’ demise?
In the first major ETF consolidation of the year, last week, Northern Trust officially liquidated all 17 members of its ETF family, the Northern Exchange-Traded Shares, or NETS. Simultaneously, the bank spent millions of dollars to sponsor a PGA tournament, the Northern Trust Open at the Riviera Country Club, and throw lavish star-studded parties around Los Angeles.
The Chicago bank paid to fly hundreds of clients and employees to the tournament, paid for their rooms at some of the city’s priciest hotels — the Beverly Wilshire, the Ritz Carlton and the Casa Del Mar — and shuttled its guests to the tournament in Mercedes.
According to L.A. gossip site TMZ.com, Wednesday, Northern Trust hosted a dinner with entertainment from the band Chicago. Thursday, dinner was held at a private hangar at the Santa Monica Airport followed by a concert from Earth Wind & Fire. Friday, the NETS were officially shut down. Saturday, Northern Trust took over the House of Blues, served salmon and filet mignon, and had Sheryl Crow serenade its guests. Female guests left with gift bags from Tiffany’s (NYSE:TIF).
TMZ said Northern Trust paid Chicago $100,000 and the House of Blues $50,000. The other two bands declined to disclose their fees. Northern Trust also footed the bill for the entire tournament and part of the $6.3 million purse.
In light of the fact that Northern Trust took $1.6 billion from the government’s Troubled Asset Relief Program, or TARP, there’s plenty of outrage over this egregious display of wasteful spending, especially since Northern Trust laid off 4% of its workforce in December. But putting that aside, couldn’t this money have been used to save the NETS?
It takes between $250,000 and $650,000 to bring an ETF to the market. Let’s say $500,000 each, or $8.5 million, to launch 17 funds. Then assume another $500,000 in annual expenses to run the funds, or another $8.5 million a year to keep the NETS operation afloat. While we don’t have a total cost for the party, from the TMZ data, it’s not hard to imagine the whole thing costing around $8.5 million, essentially what it costs to keep the ETFs afloat for another year.
Is the death of an ETF or an ETF company worth mourning? In the grand scheme of things, probably not. Definitely not by its competitors, but the ETF industry is still small, with just about 25 companies. So, less competition and fewer good ideas are bad for investors and the industry in general.
Of course, the ETF industry did go through a huge growth spurt from 2006 to 2008 as companies in a gold-rush-type spirit pushed out funds based on any idea that came into their heads. There were some great ideas, such as the commodity- and currency-based exchange-traded vehicles, and some incredibly stupid ones. Amidst a falling stock market and declining economy, investors are less willing to take a risk on an offbeat idea. So, consolidation of the industry was not unexpected. In some cases, that’s a good thing.
Among the stupid ideas we’re well rid off, let me point you to the Focus Shares. As the housing bubble popped these geniuses came out with the ISE Homebuilders Index Fund (SAW). Their other brilliant ideas were the ISE-CCM Homeland Security Index Fund (NYSE:MYP), which tracked companies that did work for the Department of Homeland Security, and the ISE-REVERE Wal-Mart Supplier Index (WSI), which followed companies that derive a large portion of their revenues from sales to Wal-Mart (NYSE:WMT).
Others like the HealthShares or the Claymore/KLD Sudan Free Large-Cap Core Fund were clever portfolio ideas, but much too narrowly focused to attract a large audience, especially in times such as these.
But the NETS were different. They offered investors the first way to invest in the world’s main global stock indexes. Instead of investing in a little known MSCI index of a foreign market, the NETS gave investors the opportunity to invest in a country’s actual benchmark. The NETS tracked London’s FTSE-100, Germany’s DAX Index and France’s CAC-40 Index, among others. The NETS were also the first to offer U.S. investors exposure to the Irish, Israeli and Portuguese markets. Also, they were run by Steven Schoenfeld, the man who wrote the book on indexing. In addition to being an indexing expert, Schoenfeld helped build the iShares business in its early days.
The NETS were reported to have $33 million in assets under management and charged an expense ratio of 0.47%, bringing in $155,100 a year. So, they weren’t paying their way, but it doesn’t cost that much to keep them going. These were young funds that needed to find an audience. So, it seems shocking that after all the time and effort to bring an ETF to market, a firm would give up on them so fast? In a down market, investors aren’t in the mood to invest, but you want to have products ready and available the moment investors come back.
While the ETF industry experienced a record number of fund closings in 2008, most of those came out of independent ETF shops. However, Northern Trust is a huge Chicago-based investment bank. According to Barron’s Dimitra Defotis, while the nation’s prominent banks are suffering and asking for money from the U.S. government, Northern Trust has a far more promising outlook.
“Unless you think the world is going to disappear in the next five years, our position as the leading wealth manager in the United States should serve us well as the U.S. market recovers,” CEO Frederick H. Waddell told Barron’s “On the institutional side, we continue to win significant asset-management and servicing mandates around the world.”
Barron’s says Northern Trust’s balance sheet is better than most other banks, because it avoided housing finance. In addition, it’s gaining customers from overseas institutions. Finally, it’s fee income, which accounts for more than half its revenue, came in at $4.2 billion last year.
So, with about $8 billion in revenues and $1.6 billion of TARP money, it seems incredibly short sighted for Northern Trust to have closed down the ETFs. And after spending about $8.5 million for a golf tournament and parties, it really wasn’t a lot to keep them open. In fact, this wasteful spending of government money for bonuses and parties shows how this isn’t just obnoxious, but actually detrimental to these banks and their customers. It is truly taking cash out of the funds necessary to run these banks’ operations. Businesses are being shut down so top managers can party. It’s nauseating.
I think the NETS were good products and I’m sorry to see them go. Since these ETFs were based on a good idea, I’m sure some other company will create similar products. Still, while the Northern Trust head honchos sang, “All I Wanna Do is Have Some Fun”, the ETF industry and investors are singing another Sheryl Crow hit: “The First Cut is the Deepest.”
Stock position: None.