A New Sports-Related ETF Shows Market Saturation

A new investment offering tied to major league sports shows just how saturated the market for exchange-traded funds has become over the past few years.

There’s now one comprised of companies that sponsor or broadcast the four major U.S. professional sports leagues: football, basketball, baseball and hockey. But some financial advisers, analysts and investors aren’t ready to play ball with the new ETF, ProSports Sponsors Fund (Ticker: FANZ ), and perhaps for good reason.

“This is gimmicky. It’s the first fund I’ve seen that’s based on companies’ marketing departments,” said Ethan Anderson, a financial adviser at Rehmann Financial in Grand Rapids, Michigan. “I can’t see putting this in a portfolio, except for fun. If a client is interested in sports, when they watch a game on TV, they know they own those companies that are advertising.”

A 36.4 percent weighting in consumer discretionary stocks, such as McDonald’s, and a 15.1 percent weighting in technology stocks, such as Microsoft, tilt the fund toward a growth strategy. That’s fine, experts say, as the companies are likely doing well and confident if they are spending big money on sports sponsorships.

But the strategy leaves out the element of price. “The question shouldn’t be how fast they’re growing,” said Tom Frederickson, a financial adviser with the Garrett Planning Network in New York. “The question is how much are you paying for growth. Their screen doesn’t account for valuations.”

And if you’re simply looking for a large-cap, growth-oriented ETF, you can find one for much less than the ProSports Sponsors Fund’s 0.69 percent expense ratio, according to Fredrickson and other critics. The average expense ratio for U.S. large-cap stock ETFs is 0.39 percent, according to Morningstar.

In addition, experts say it’s unlikely that sponsorships of pro sports leagues lead to a major portion of revenue for most of the 66 companies in the fund. “These stocks will be affected by so many other factors,” said Mick Heyman of Heyman Investment Counseling in San Diego.

The index on which the fund is based — the ProSports Sponsors Index — outperformed the S&P 500 over the one-, three-, five- and 10-year periods through June 23, according to the fund’s sponsor, SportsETFs. ProSports Sponsors Fund began trading July 11.

“Over time we believe that the companies that invest in pro sports partnerships grow faster than the broader economy,” the fund’s marketing document states.

Experts aren’t convinced. “I’m glad they believe,” said Elisabeth Kashner, director of ETF research for financial information company FactSet. “But belief and back-testing aren’t enough.”

As justification, ProSports Sponsors Fund’s management cites a 2016 study from PwC estimating that sports sponsorships will grow at a 3.9 percent compound annual rate from 2015 through 2020, reaching $18.7 billion. But a 2014 McKinsey & Co. report that they also cite says, “linking sales directly to sponsorships is typically challenging.”

Nick Fullerton, president and co-founder of SportsETFs, said in an email that no other industry gives companies access to such "loyal and passionate" customers.

"We found both statistical and anecdotal evidence that supports and shows sponsorships and partnerships help drive revenues," he said. "The official sponsors of the leagues are getting increasingly sophisticated in how they spend their marketing budgets and will use their money wisely to get the greatest returns possible."

The marketing document says the ETF "can be utilized in a portfolio as a core equity position, and can be viewed as offering exposure to the S&P 500 with a sports specific lens." Again, critics take issue with that claim. With its narrow focus and high fee structure, the fund doesn't represent a core position if you're seeking an allocation to the entire stock market.

In terms of allocation to large-cap stocks, it may be considered a core position, but you could own the same companies in a fund without the constraints of the ProSports Sponsors Fund, said Anderson. Almost two-thirds (43) of the fund’s stocks are in the S&P 500. But FactSet benchmarks it to the MSCI ACWI (All Country World Index) Plus Frontier Markets index, because it includes foreign stocks. Rogers Communications of Canada is the new ETF’s biggest holding.

Kashner questions the fund’s decision to equally weight its 66 holdings, because the smaller companies may carry more risk. The weighted average market capitalization of companies in the fund was $89.7 billion as of Aug. 14, just over half the $172.1 billion total for the iShares S&P 500 Index ETF.

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Anderson wasn’t blown away by the qualifications of the co-founders of SportsETFs. Fund manager Fullerton is a registered investment adviser, spending the last eight years as a principal at Fullerton Advisors in San Ramon, California. And Chief Marketing Officer Jim Kozimor was an Emmy-Award winning sports broadcaster. “The biographies don’t look like those of most money managers,” said Anderson.

So, will their fund prove to be an investment winner?

Many fans have an emotional or spiritual attachment to sports that’s similar to religion, according to Kashner. “But the last time I checked that’s not a great investment philosophy,” she said. “It’s divorced from a cold, hard, analytical approach.”

Kasner says the introduction of an investment offering like the ProSports Sponsors Fund reflects the saturated state of the ETF market, as the space for broad-based, cheap, vanilla funds is already occupied.

“Most of round 2 and round 3 in complexity have been taken too,” she said. “There’s not a lot left.”