With the immense popularity of exchange-traded funds, many investment companies have jumped on the bandwagon to add ETFs to their menus. But one company, instead of merely tweaking its products, completely revamped itself and changed its name to embrace Wall Street's investment darling.
New York-based XShares had never offered anything like a mutual fund or ETF to the public until a year ago this month, when it filed an application with the
Securities and Exchange Commission
to create its first set of ETFs called HealthShares.
Since then, it rolled five HealthShares ETFs onto the market, with another 15 waiting to be launched. The company has also filed for several other families of ETFs, including StateShares and Independence Shares, and is working with other companies to create privately labeled ETFs.
Birth of an ETF Firm
XShares was born from the marriage of two companies: Ferghana Partners, a company that provided advice to life-sciences firms, and Wellspring BioCapital Partners, an investment firm offering products based on next-generation treatments, therapies and cures for diseases.
Under the name Ferghana-Wellspring, the company filed as a corporate entity in August; it then changed the name to XShares in January.
Jeff Feldman, CEO and co-founder of XShares, says that when the company decided to enter the ETF space, the initial focus was to create useful tools for investors to get exposure to the $2 trillion health care industry.
He adds that the name XShares actually originated from the idea that the company could create a platform to private-label ETFs for other companies. The "X" is a blank to be filled in.
A Different Route
Entry into ETFs was different for XShares than for its predecessors. Although the company created health care and biotechnology indices and had a unit investment trust, it did not offer anything like a mutual fund. However, ETF players such as Barclays Global Advisors, State Street Global Advisors and Vanguard were already heavily involved in the index fund market before getting into ETFs. And newer ETF entrants such as Claymore Securities and First Trust were big in the closed-end fund spaces when they launched their first ETFs.
HealthShares are designed to track thin slices of the health care sector, specifically publicly traded health care, life sciences and biotechnology companies. The five HealthShares that have been launched are
HealthShares Cardio Devices (HHE),
HealthShares Diagnostic (HHD),
HealthShares Emerging Cancer (HHJ),
HealthShares Enabling Technologies (HHV) and
HealthShares Patient Care Services (HHB). These ETFs all carry an expense ratio of 0.75%.
The 15 additional HealthShares that have been filed with the SEC cover everything from Asian health and autoimmune-inflammation to dermatology and wound care. The expenses for these ETFs vary between 0.75% and 0.95%.
Getting Into Launch Mode
XShares is also getting ready to launch StateShares, which are based on S&P indices and are designed to track the top 50 publicly traded companies based in a designated state. The indices underlying the StateShares ETFs include only stocks that are listed on a major national securities exchange and have had a market cap of more than $100 million for at least two of the three preceding quarters. StateShares are still in registration with the SEC.
Feldman says XShares' business isn't only about developing its own products. In fact, he says that after the company filed the application for HealthShares with the SEC, which he calls a "labyrinth-like process," the company realized that there were probably others who wanted to issue ETFs but were deterred from the SEC filing process -- a well-known thorn in the side of many ETF companies.
XShares, he says, decided to make that process easier by licensing indices from companies that have expertise in a certain space and creating ETFs on them, including going through the approval process.
The company also recently announced two additional agreements, one with Chicago Climate Exchange to develop products based on carbon-emission credits, which will be called AirShares, and another with Elliot Wave International to create ETFs that are designed to satisfy special needs in the financial marketplace.
"We now have about 130 potential groups who want to create ETFs with us," Feldman says. "We see narrow indexes as an alternative to single-stock ownership," Feldman says, adding that owning an ETF that represents a group of companies eliminates the single-stock risk.
But because these are narrow products, Feldman says they are generally geared at sophisticated investors or registered investment advisers.