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Dec. 4, 2020, 9:28 a.m. EST

ETF Wrap: Size doesn’t matter

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Andrea Riquier

Winter is coming.

Raise your hand, Game of Thrones binger, if you used to get a delicious chill thinking about the next episode of that drama, with its undead “White Walkers,” warring families and a season of cold that lasted a generation.

But now, facing the final stretch before a return to what we hope will be a vaccine-enabled normal life next year, winter is coming — and it may not feel all that exhilarating.

The next few months are going to be challenging , as coronavirus cases rise, the health care system is strained and small businesses fight to stay alive.

Market activity may be reflecting some of that angst. We’ve bounced between exhilaration when the economy tentatively reopened and the realization that work-from-home is not going away soon. When investors pin their hopes on reflation, financial ETFs outperform . But when we retreat inside, “Black Friday” means e-commerce over in-store shopping and a preference for ETFs capturing that shift.

Thanks for reading, and stay safe and healthy.

One of the biggest pieces of recent news in the ETF ecosphere may have escaped the attention of many investors.

On Monday, S&P Global Inc., the company behind many of the indexes that underlie some of the most popular ETFs, said it would buy IHS Markit , a massive provider of financial data, for about $44 billion.

Dave Nadig, chief investment officer and director of research at ETF Database, sees the tie-up as a step toward creating industry behemoths. “This positions them against the London Stock Exchange,” he told MarketWatch. “I see it as a defensive play more than anything because the LSE has made such big moves.”

When the dust settles, Nadig expects to see a triumvirate of index and data providers somewhat analogous to the “Big Three” of asset managers, Vanguard, BlackRock and State Street.

S&P Global has a market cap of about $80 billion, according to FactSet. The LSE, meanwhile, is valued at about $28 billion, and Refinitiv , a company it plans to acquire, at about $27 billion.

But the third player, MSCI, is a fraction of the size of the newly-created behemoths but “punches above its weight,” Nadig said. It’s “a very tight-knit business, a very strong corporate culture, a strong sense of their product and service offerings. The brand is so strong and iconic that even though it’s small, from a brand perspective, it’s huge.”

Unlike many observers, Nadig doesn’t think size matters for end investors. “The reality is that top-heavy dominance has been nothing but good for consumers,” he said. The race to the bottom for fees, and the choices available throughout the fund complex are all positives, he said.

Another mutual fund family is planning to convert into ETFs . The Adaptive family of funds, which include Adaptive Fundamental Growth, Adaptive Growth Opportunities , and more, will start the transition process in January, according to the Nottingham Company, an advisor to the funds.

Remember earlier in the fall, when bank ETFs were hot one week, in the loser’s seat the next? Now we’re watching energy-services stocks bounce back and forth. The 9-10% gains they enjoyed last week were erased this week. Stay tuned.

Nope, there’s still no bitcoin ETF. But “things are looking up,” said Matt Hougan, chief investment office for Bitwise Asset Management.

Hougan is also a long-time veteran of the ETF industry, and he thinks the stars are aligning for a bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.26% ETF to come to market soon. Among other things, he points to the “widespread increasing acceptance of bitcoin as an asset class,” including by big institutional players like JPMorgan .

There’s also been “ enormous growth ” in the infrastructure that supports bitcoin as an asset class, Hougan told MarketWatch. The CME Bitcoin futures market is facilitating the trade of substantial volumes of money every day, and more institutions are taking part. Well-known names like Fidelity are now involved in custody of the currency. “These developments should give regulators a great deal of comfort,” he said.

Right now, individual investors can easily buy bitcoin through a number of platforms, including PayPal . But the push toward an ETF is meant to make a product that’s easy for advisors to offer their clients, Hougan said.

The investment case that those advisors will make? “It’s the ultimate alternative asset,” Hougan said. “It combines three things that are difficult to get: high returns, low correlations to other assets, and daily liquidity.”

For now, Hougan has a few pointers for anyone who wants to make a small investment in bitcoin. “You should use a familiar brand name because partners really matter,” he said. PayPal is one option; Coinbase another. “Make it small. Our average client has two and a half percent of their portfolio in bitcoin. It’s a risky asset and you want to buy it for the long-term. It’s too volatile for short-term trading.”

MarketWatch has launched <STRONG>ETF Wrap,</STRONG> a weekly newsletter that brings you everything you need to know about the exchange-traded sector: new fund debuts, how to use ETFs to express an investing idea, regulations and industry changes, inflows and performance, and more. Sign up at this link to receive it right in your inbox every Thursday.

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