“We had no idea what we were getting into,” Benvenuto says. “Google is what we had for research.”
Their quest seemed quixotic, if not naive. Yet they were determined and proceeded with their idea. They have a mutual friend who was being mentored by Ivy McLemore, managing director of communications at Guggenheim Partners, which oversees a large suite of ETFs. Their friend suggested that they contact McLemore.
“So we reached out to him [McLemore] and he thought it was a good idea, if not ambitious,” Benvenuto says. “We arranged a meeting with him and he suggested we meet with Tom Lydon.”
Lydon, who is president of Global Trends Investments and editor of ETF Trends.com, agreed to meet them in Manhattan last May.
“We brought to him a one-sheet concept page, and he said the things we needed were an investible methodology and universe,” Benvenuto recalls. “At that point we just had the broad constructs of what those concepts were and what those specific terms really meant and what the process of building these would be.”
Lydon couldn’t be reached for comment.
Despite the raw state of the duo’s ETF idea, they say Lydon offered encouraging words and recommended they see Rahul Sen Sharma, a partner at Indxx, which has created indexes that underpin roughly $1 billion in ETF assets under management at providers such as Global X, First Trust, Columbia Threadneedle and VanEck. But they didn’t think the time was right.
“At that point we didn’t feel we were ready to pursue an indexer without grounds for either a methodology or a universe,” Benvenuto says. “Plus, the concept wasn’t entirely firmed up at that point. But we had an idea of where we wanted to go.”
Much to their surprise, they were able to gain the rights to the ETFS ticker symbol thanks to assistance from McLemore, who enlisted the help of a Guggenheim colleague who found out the symbol was available on the NYSE.
“When we heard back, they went above and beyond, and reserved ETFS from the NYSE,” Benvenuto says. “As far as we know, it's reserved indefinitely. However, if someone else requests it, we have 30 days to file something or give up the ticker.”
Meanwhile, they took a few shots at developing a methodology and constructing an investible universe of ETF-related companies.
“It was the summer, so we had time and we took it at our own pace while we were working summer jobs,” Harkin explains. “We wanted to get more meat on the bones before we took it to anybody else.”
The trouble they had was determining what companies actually should or shouldn’t be in their index because with the exception of WisdomTree—the only publicly traded pure-play ETF company—it’s difficult to parse exactly how much ETF-related revenue comprises the total revenue of companies involved in the ETF space, or ecosystem.
Based on existing research sources, Benvenuto and Harkin identified roughly 250 companies in the global ETF universe and divided them into eight categories, or sleeves. According to their sleeve weighting system, each category would be equal weight (12.5 percent of the index). And each sleeve of holdings would be weighted by their own respective index methodology rules, based on factors related to how revenue is generated within that category, or by the individual characteristics of the companies within each sleeve.
“This is our recommendation, but is by no means definitive or binding, just a possibility from how we view the ecosystem,” Benvenuto says.
Benvenuto and Harkin eventually felt confident enough to present their idea to Indxx, and in late February they met Rahul Sen Sharma at Indxx’s New York City office.
“I was pretty impressed with their effort,” says Sen Sharma. "We get ideas pitched to us ranging from big-name firms to people who have ideas but who haven’t done a lot of the legwork. I was really impressed that Stephen and Mark had done a lot of the legwork and put a lot of research into the concept before they approached us. They looked at the concept and fleshed out a good number of potential constituents.”