USA
Exchange Traded Concepts lists dual share class ETF
Dual share classes have caused something near controversy in index-land. S&P Global dislike them and have banned them from some of their indexes. MSCI has decided to tolerate them as their own research has found that companies dominated by founding families tend to perform better.
But now Exchange Traded Concepts, the white-labeller, aims to do something new and potentially brilliant: build an ETF that invests exclusively in dual share class companies. What’s more: it aims to buy the share classes with zero voting rights.
With the help of North Shore, the new index provider, ETC is listing the North Shore Dual Share Class ETF (DUAL). The fund will be built from the ashes of ETC’s failed forensic accounting ETF (FLAG), which ceased trading in April.
DUAL will buy dual share class companies with a market cap greater than $100M. Companies included are then market weighted. The index is rebalanced annually. The prospectus on the SEC website does not include an expense ratio.
Analysis – nice idea
A good starting point for today’s analysis is the old failed ETF – FLAG. FLAG was basically a quality smart beta fund. It ran a “forensic accounting” screen over the quarterly reports of S&P 500 companies. It then invested in those whose balance sheets and income statements looked the best.
It was a nice idea. It even had a former hedge fund boss at the helm. But while the idea was appealing, the fund underperformed and never collected assets. My gut feeling is that FLAG might be a precedent for DUAL.
The idea, again, is appealing: there is some evidence that family-controlled businesses do better. Much like there is some evidence that companies that have better balance sheets etc. do better. MSCI has a backtest showing that dual class stocks outperformed in the US from 2007 – 2017 (they failed to elsewhere though – including my own backyard). Much like backward looking models used by FLAG when it listed in 2013 showed it outperforming.
But index backtests, as we all know, count for nothing. And being family controlled is not the same thing as having a dual share class.
Let’s see how this goes.