Copycat ETFs Are Everywhere. Should Issuers Worry?

Imitation is often called the highest form of flattery. Issuers might disagree.

As ETF launches carry on at breakneck speed, shattering year-to-date records and showing no signs of slowing down, strategies have begun to look, well … familiar. As issuers innovate, and as institutions build out their model portfolios, so-called copycat ETFs are increasingly common. Copycat filings take a product proposed to the Securities and Exchange Commission and mimic its strategy or allocations, usually within the 75-day waiting period following a submission, when the basic details of a fund’s structure are made public. For example, the VanEck Agribusiness ETF (MOO) spurred an Irish counterpart, MOOO, which launched just a year later. Invesco even launched a copycat of one of its own funds, Invesco Nasdaq 100 ETF (QQQM), a near-carbon copy of QQQ but with a lower fee.

“If you go back in time, and you look at SPY being the first S&P 500 ETF and GLD being the first gold ETF … that first-mover advantage has been absolutely astronomical over time,” said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar Research Services. “Does that mean it has to be within 75 days to try to get in on that initial first-mover advantage? I don’t know.”

Copycat and Mouse

Copycats have been present since the dawn of the ETF industry, said Matt Kaufman, head of ETFs at Calamos Investments. SPY quickly attracted S&P 500-tracking mimics in the iShares S&P 100 ETF (OEF) and Vanguard’s S&P 500 ETF (VOO). Invesco, formerly PowerShares, built the first non-market cap weighted indexes with its Intellidex ETFs in the early 2000s. First Trust and iShares have since followed suit. “The idea of copycatting a product, I don’t think is necessarily bad,” Kaufman said. “It can create choice in the marketplace.” But as strategies become increasingly complicated, due diligence has become more important than ever to determine whether the issuer has expertise in a given area or is just replicating someone else’s idea.

Even though copycats have existed for years, some experts point to the advent of cryptocurrency ETFs as the moment when blatant dupes began taking off. Last year, the SEC approved 11 spot bitcoin products — all roughly identical, save for fees and share prices. Since then, spot products tracking different cryptocurrencies and crypto indexes also began trading. Despite there being multiple versions of these products, however, many have managed to remain relevant due to the sheer size of the spot bitcoin market. “I’d originally thought that by this time, you’d have seen half of [spot bitcoin ETFs] close, but the space is so close that even the smaller ones are $500 million,” said Greg Stumm, CEO of American Beacon Partners. “That fills a hole for those firms … spaces that aren’t the size of bitcoin ETFs will see closures.”

Another reason for copycats is that firms might want to bring a strategy that has previously only been offered as a direct-to-consumer product to wirehouses or independent broker-dealers. “You might see an ETF issuer that’s been successful with an idea or product in the DTC market, and another will say, ‘That’s an interesting idea, but they haven’t been able to break into the Merrill Lynches, the LPLs of the world. But we can do that,’” said Stumm.

The onslaught of crypto ETFs also coincided with the SEC’s more deregulatory approach in recent years, which Armour said has likely facilitated even more copycats. In 2019, the agency adopted its ETF Rule, which sped up the process for funds waiting to go to market. Its signaling of support for dual share classes fueled copycat filings over the summer as issuers drafted their own versions of Dimensional Fund Advisors’ proposal, which was approved earlier this week. “We had basically every asset manager take the text of Dimensional’s filing and refile each time they went through a refiling process with the SEC,” Armour said. The reason for the refilers, he added, was that asset managers were trying to get as much of a first-mover advantage as they could.

ETF Blade Runner. So are replicants something to be feared? Not necessarily. “In my own perception, you would want to buy from the reputable source, which is often the first mover,” Kaufman said. Calamos helped launch some of the initial buffer ETFs, with the first such product launching in 2018. Now, there are a dozen buffer ETF providers, he said. “Maybe the first mover has more of their ducks in a row, and those coming after might, but they also might have just seen a filing and copied that and then are going to spend the next 74 days figuring it all out.” More choice is generally a good thing, he added, since it fosters innovation.

The pace of copycats is likely to increase as more ETF issuers come to market and more investors look toward the ETF wrapper. Over the past three years, the number of issuers in the US has doubled and now stands at 268, according to data from Bloomberg. Whereas before, a firm would follow up only after seeing a new concept garner assets, now firms will file even before the first strategy begins trading, Kaufman said.

“That’s kind of the goal of competition and copycat filings, is to improve upon what the last person has done,” Kaufman said. “We’re on the iPhone 17 now. There’s ideally reasons for having a new one every time. So I think that part can be healthy.”