VanEck Adds ETFs to Get Around Concentration Rules

In the age of billionaires like Elon Musk, Larry Ellison and Jeff Bezos, and the outsize companies they lead: Market-cap weighted indexes are out of whack.

Or more diplomatically, they’re highly concentrated. One theme this year has been the rise of equal-weight ETFs and similar funds that help investors diversify beyond the big names. But that hasn’t helped RIAs tracking uncapped benchmarks, as concentration limits have kept index funds from allocating more than 25% to any one security or 50% in total among all securities with 5% or more of assets. One issuer, VanEck, has been working on a line of sector ETFs designed to get around those limits and still comply with federal rules for registered investment companies; the products offer “truer exposure to these sectors that investors are looking for,” says the company’s director of product management, Mike Cohick. 

Truthiness

The company launched its first two TruSector ETFs in August, with one focused on technology and the other on consumer discretionary. It has a third for communication services that can go live whenever the company wants, and VanEck filed earlier this month for an expanded suite of others. Currently, it’s testing demand and is considering launching the communications sector ETF, Cohick said. “We’re working with our client partners to assess demand like we do for any ETF launch,” he said.

The ETFs reflect market cap weightings by investing in individual stocks and other ETFs. “We’re owning the securities in a sector up to the [Registered Investment Company] weights,” Cohick said. “In order to get the full market cap weight of a stock … our portfolios will own a nonproprietary ETF in that sector.” That works, since the SEC and IRS rules don’t require a “look through” of the holdings of ETFs within other ETFs, he said. For example, the VanEck Technology TruSector ETF (TRUT), has 16% of assets in Nvidia, 14% in Microsoft, 13% in Apple and 44% in the Technology Select Sector SPDR Fund (XLKI).

A look at some of the others:

• The Consumer Discretionary TruSector ETF (TRUD) has 20% in Amazon, 6% in Tesla and 71% in the Consumer Discretionary Select Sector SPDR Fund (XLY).
• The ETFs it filed for on Oct. 10 cover energy, financials, healthcare, industrials, materials, real estate and utilities.

Here’s an Idea: An asset manager that runs separately managed accounts introduced the concept to VanEck, which ran with it. Indexes have been forced to underweight the largest companies and overweight some of the smaller ones in order to comply with the concentration rule, Cohick said. “The worst of the worst is information technology, because it’s such a big part of the S&P 500.”