Ok, let me just confess up front that I’m going to have a really – really – hard time writing this in a way that isn’t over-the-top derisive, but I’m going to give it a shot.

One more quick caveat: this is just a quick take. It’s Friday afternoon as I write this and I’m tired, but rest assured, this won’t be the last you hear from Heisenberg on this subject.

So I’ve received no fewer than 13 e-mails (as of this writing) asking me to weigh in on something called “The ETF Industry Exposure & Financial Services ETF” (NYSEARCA:TETF).

This thing is an ETF that tracks an index built by Toroso Investments LLC. According to the prospectus, the index (and by extension the ETF) is designed to “provide exposure to companies that derive revenue from the Exchange Traded Funds business [and so] constituents include ETF sponsors, index & data companies, trading & custody providers, liquidity providers, and exchanges.”

The day-to-day management of TETF is left to Exchange Traded Concepts LLC and one Penserra Capital Management LLC. More specifically, the fund is managed by Dustin Lewellyn, Ernesto Tong, and Anand Desai.

Here’s what the trio did prior to working at Penserra:

  • Tong spent seven years a vice president at Blackrock, managing iShares ETFs;
  • Desai was a portfolio fund accountant at State Street for five years;
  • Lewellyn was President and Founder of Golden Gate Investment Consulting LLC but prior to that, was a managing director at Charles Schwab Investment Management and head of portfolio management for Schwab ETFs

Well, guess what? It turns out the index the ETF tracks (Toroso’s ETF Industry Index) includes BlackRock, State Street, and Schwab. And not only that, they’re part of an equally-weighted group of companies deemed “Tier A” which together comprise 50% of the index:


Imagine that.

Now to be sure, there’s nothing inherently nefarious about that, but you should nevertheless be aware that the three portfolio managers here are by definition funneling money into their former employers’ shares. Again, nothing evil about that, but it is what it is. And it’s something you should note from the get-go.

So there’s that. Further, do note that the expense ratio here is 0.64%. So it’s four-and-a-half times as expensive as Financial Select Sector SPDR ETF (NYSEARCA:XLF) which invests in a whole lot of the same stocks. So why pay more?

Also note the companies that Toroso somewhat euphemistically calls “liquidity providers.” Some of these are designated “Tier B” companies which comprise, together, 25% of the index. Here’s the list:


See Virtu and KCG in there? You know what they are, right? They’re HFT firms. Algos. Machines.

Also, you remember KCG don’t you? It came into existence when Knight Capital merged with Getco in 2012 after a screwup with one of Knight’s algos cost the company nearly a half billion in the short space of 30 minutes.

One more time: nothing nefarious in terms of TETF, but still something you should be aware of in terms of knowing what you’re getting into.

Finally, you should note that what you are doing when you buy this product is doubling down on your exposure to any potential glitches in the ETF creation/destruction/liquidity process.

That is, you’re not only exposed by virtue of owning an ETF, you’re also exposed because the ETF you own tracks the shares of companies who are themselves responsible for making sure ETFs function properly.

That means that in the event something goes wrong, you’ll have a mechanical problem on your hands (you’ll own an ETF), but you’ll also have a fundamental problem because even if things get straightened out, the people who will be blamed for the initial trouble will be the companies you own through the ETF.

In short, this looks to me like a gimmick designed simply to capitalize on the popularity of ETFs. And the irony of the whole thing is, this is a vehicle that promises to help investors capitalize on the rise of passive management, but they’re charging an expense ratio that looks more like something active managers would charge.

If I were you, I would stay well clear of this.

And that’s me exercising more restraint than I thought possible.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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