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The idea that yanked Bruce Bond and John Southard out of early retirements was just too good to pass up.
The two men are old financial hands, and when they sold their first company, in 2006, they walked away wealthy. Southard dabbled in a real estate startup and Bond, puttering around on his farm, wondered if he could make a go out of growing grapes for wine.
But as the founders of one of the earliest blockbuster exchange-traded fund companies, they knew an opportunity when they saw it. Southard, who had been pitched an annuity for retirement, saw the benefit of the certainty such products offered, but wondered if that strategy could be deployed in a less-expensive structure: an exchange-traded fund, for example.
With a little research, Southard and Bond determined that their idea was novel, but doable, and had a strong chance of success. Bond hired a manager for the vineyard, and the two men set up shop. In 2018 they launched their product, a set of ETFs that uses an annuity-like product to buffer against big stock market swings.
Now their schedules are full again, and not just in ensuring the success of their funds. In an ETF industry that’s flourishing in large part because of their own pioneering efforts, Bond and Southard find themselves in an uncomfortable position: so protective of the idea they developed they’ve become nearly evangelical about the need to guard against intellectual property theft in the ETF space.
“If you have a really novel idea, you should have the opportunity to protect that,” Bond said in an interview. “Otherwise, smaller issuers have a good idea, they put it out there and raise some assets, and then it costs the big guys almost nothing to copy their product. They just copy it, drop the fee way down and the smaller guy is out of luck, but it was really their creativity, all of their inventiveness to introduce the product.”
It is somewhat ironic that Bond and Southard are “the little guys” in this calculus. They sold their earlier venture, PowerShares, to the massive asset manager Invesco for hundreds of millions . One PowerShares product, known by its ticker, QQQ /zigman2/quotes/208575548/composite QQQ -0.39% , is now one of the most widely-traded ETFs on the planet, with $81 billion in assets .
Now, after being available for just over a year, Bond and Southard’s brainchild has already gathered $1.6 billion of its own. It’s called the Innovator “Defined Outcome” series, and it launches several different funds every month, each with a different level of market “buffer.” The beauty of the “annuity” approach is to allow investors access to stocks, and while they don’t share fully in the potential upside, their exposure to big downside losses is also mitigated. (MarketWatch profiled the funds in August.)
The fund known as the S&P 500 Buffer ETF December /zigman2/quotes/215373414/composite BDEC -0.28% , for example, launched Dec. 1. It buffers against the first 9% of losses in the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.07% over the coming year, a tantalizing proposition as this piece goes to print, with major stock indexes /zigman2/quotes/210598065/realtime DJIA -0.26% down more than 2% in the first two days of the month.
Related: Is it time for ETFs to get active?
Bond and Southard spent time and money — “multiple millions of dollars” of their own, they say — starting a new venture, launching it into the world, promoting it and overseeing its ongoing administration.
What’s more, the concern that someone might rip it off is not farfetched.
The ETF universe is full of ideas that a smaller firm nurtured, only to see it replicated by another, often bigger, money manager. As Bond suggested, some of the bigger firms that have greater economies of scale are often able to charge rock-bottom fees for the same idea that a smaller issuer nurtured to fruition. In ETF land, sometimes that’s all that matters.
MarketWatch spoke with many people for this article, all of whom were very comfortable speaking on background about the idea of ETF IP theft and the industry’s biggest offenders, but none of whom were willing to be quoted. That’s even as just about every interviewee referred to the ETF industry as “collegial,” “accepting,” and “inclusive.”