A small ETF shop thrives in Vanguard's backyard by winning advisors and investors with snappy funds -- while following a decidely anti-Vanguard strategy and charging 13 times the fees

In an ETF industry where scale and cost mean life or death, one improbable asset manager, a literal stone's throw from industry giant Vanguard, is thriving with no scale and high costs.

Pacer ETFs, an upstart firm founded in 2015 in Vanguard's Malvern, Pa., backyard, has soared to $46 billion in assets with a decidedly anti-Vanguard strategy. 

Pacer charges fees 13.8 times greater, on average, than Vanguard, and unabashedly compares its sales force to “reformed” high-pressure annuity sales reps. 

Added to that are a set of ETFs with snappy names like “Pacer Cash Cow Series” (essentially a value fund) and the Pacer Trendpilot Series that give sales reps a story to sell. 

And, it prides itself on setting “insane” goals, which are better to miss than “reasonable goals,” says its founder and distribution president, Sean O'Hara. 

It may sound like an “insane” formula for success against the economies of scale and the massive brand recognition of ETF giants Vanguard, BlackRock and State Street. 

But… it seems to be working in an industry where the giants eat small ETF shops for lunch with low and no-fee pricing. 

Something different

Pacer has been "clever in terms of product development. Their products appear to be different enough from what is generally available that they stand out,” says Scott MacKillop, founder and former CEO of the TAMP, First Ascent Asset Management. 

They are “story-oriented funds that would appeal to advisors who believe in active management, sell based on performance, and want something a little different to offer their clients,” he explains in an email exchange.

Pacer also has “a culture and history dominated by distribution, rather than asset management personnel," says MacKillop, whose firm was acquired by GeoWealth in March 2023. See: Scott MacKillop sells First Ascent over nine months 

When it has a period of good performance, its distribution capabilities can capitalize.  And their growth has been impressive.

"Carving out a $46 billion asset base is not an easy feat,” he adds.

Boiler room culture

Founders O’Hara and Joe Thomson make no attempt to recreate Vanguard's Bogle-esque mythology – simplicity, efficiency, broad market exposure, low fees, and long-term discipline.

To the contrary, Pacer's corporate culture is more akin to a stock shop, which it was 21 years ago when it became a broker-dealer after selling insurance and investment product distributor PLANCO to Hartford Financial Services in 1998.

For staff, “we’re mostly tapped into ... blue-collar Philly and Delco (Delaware County) … people who wanted to do better than their parents, [so] we’re not going to recruit a lot from the Ivy League,” O'Hara told The Philadelphia Inquirer.

Two of Thomson’s daughters, his son, and his son-in-law all work for Pacer, including two in executive roles at the company, which employs 165 staff overall.

Like any well-schooled sales staff, they think big in the bullpen.

“We have to surprise people, to sell something unique. We have to show a higher return and show the financial advisers it makes sense,” O'Hara told the Inquirer. 

Cowz come home

Pacer manages 65 funds in total and 55 ETFs have an average expense ratio of 0.69% – far higher than Vanguard’s 0.05% average. Another 28 funds clock in with fees of 0.6%, according to Morningstar data.

Roughly half its client assets, however, are in its best-known ETF, Pacer U.S. Cash Cows, COWZ series. 

The 2016-launched free-cash-flow-hunting COWZ manages $20.3 billion today, up from $248 million at year-end 2019.

The $30 billion managed by the firm's wider ‘Cows’ ETF series accounts for 65.2% of its total AUM, according to a release.

The COWZ fund is made up of 100 of the Russell 1000 big-company stocks that have the highest cash flows, which it claims suggest future profits, not those with the biggest recent profits. 

COWZ features holdings like ExxonMobil, AT&T, Pfizer, UPS and Comcast from different industries but loaded with cash flow and dividends.

Between 2017 and year-end 2021, the company grew at a steady pace of $2 billion a year, from $1 billion to $9 billion.

Then it went stratospheric, quintupling its pace, adding $10 billion a year in 2022 and 2023, before adding $16 billion in 2024.

COWZ beat the S&P 500 by double-digit margins in 2021 and 2022, but has slipped behind the index for the past few years.

Targeting RIAs

Avantis, which only launched in 2019 and already surpassed $50 billion in AUM, is its closest small shop rival.

But Avantis often undercuts on price, and it has a legacy provider, American Century, backing it. 

And, Avantis engages intensely with the advisor community. See: Amid crumbling 'factor' fund pricing power, Fidelity slashes factor ETF fees; low-factor-price Avantis soars to $30 billion in third year, and new study says factors are barely a factor in returns

Pacer also markets to RIAs -- something Vanguard doesn't deign to do much of. It claims15,000 of the estimated 18,500 RIAs in the industry list Pacer ETFs in their fund line-ups.

Eye on expansion

Thomson just acquired the means to treble the firm's office space too, after buying three offices – once used by Vanguard, and a five-minute drive from its headquarters – totaling 226,000 square feet, on a 33-acre plot. 

The $12.5 million purchase gives Thomson the option of increasing Pacer's Chesterfield Parkway footprint, in a small ‘campus’ directly opposite Vanguard's Malvern office sprawl.

"We can be at $100 billion in a few years," Thomson told the newspaper.