William H. Belden, III is a managing director and head of product development at Guggenheim Investments. Mr. Belden has direct oversight for mutual funds, closed end funds, exchange-traded funds, variable annuities and product strategy. Prior to his current role, he was responsible for the overall operations of Guggenheim Investments ETF business line, which included product development, distribution and marketing activities.
Mr. Belden earned his MBA from the University of Chicago’s Booth School of Business and has a B.S. in finance from Miami University. He is series 7, 24 and 63 registered. Here are excerpts from his conversation with Research magazine.
The Guggenheim S&P 500 Equal Weight ETF (RSP) celebrates its 10-year anniversary in April 2013. Do you think equal weighted portfolios have gotten the recognition they deserve?
Launched in 2003, RSP was Guggenheim Investments’ first ETF as well as the first alternatively weighted ETF—a milestone in the industry. As you mentioned, the fund will celebrate its 10th anniversary later this year, which is a tremendous milestone specific to Guggenheim Investments.
Alternative weighting methodologies, such as equal weighting, have garnered significant attention during the past several years, however we still do not feel that equally weighted portfolios have received the recognition they deserve. Cap weighting is the more traditional and commonly used investment methodology, while equal weighting takes some explanation to understand its many benefits, including outperformance and diversification potential. As it relates to diversification, equal weighting has the ability to provide broad exposure across market segments and sectors, which may reduce concentration risk and result in a more balanced portfolio. Furthermore, a systematic quarterly rebalance serves the purpose of reallocating from index constituents that have appreciated the most, and have potentially become over-valued, to those that have decreased in value, and are potentially undervalued.
Those investors who have taken the time to educate themselves on the potential benefits of equally weighted strategies may have realized significant outperformance over the traditional cap-weighted approach. For example, over the past five years, RSP has offered more than 1,400 basis points of outperformance when compared to SPY, while exposing the investor to only slightly higher levels of volatility with 5-year annualized volatility levels of 23% and 19% respectively.
It is important to note that equal weighting will not outperform during all market cycles. Historically, this weighting methodology has lagged during periods of mega-cap outperformance. However, it should be considered as part of the core equity holdings discussion alongside the market-cap weighted products.
Emerging markets still have higher economic growth rates compared to developed markets and many of these countries even have less debt. What kind of opportunities do you see?
Emerging market ETFs represented the fastest growing ETF segment in January of 2013 with $5 billion in net inflows. We see exciting opportunities in a number of emerging market locales including Latin America and China. Taking a top down approach, what happens in the U.S. affects emerging markets. Per the U.S. Department of Commerce, and despite the slight contraction in Q4 2012, the U.S. economy has been expanding since Q3 2009. This drives export demand and presents growth opportunities for emerging markets. As China continues to import materials to fuel its export machine, emerging nations rich in natural resources, such as Chile and Peru, tend to benefit.
Chile and Peru fall into a somewhat grey area with many index providers. Both have developed just enough to be included as emerging nations with some providers, thus giving them a very small percentage allocation within the index. As an alternative, the benchmark index for the Guggenheim Frontier ETF (FRN), is maintained by BNY Mellon, and includes Chile and Peru. As such, both receive larger allocations within that index. FRN is a simple way to get exposure to this region without having to assume significant single country risk.
The Guggenheim China Real Estate ETF (TAO) gained 58.73% and was a top performing ETF in 2012. How important is China to the global economy?
China has been, and continues to be, incredibly important to the global economy. It is the largest exporting nation in the world, the most populous, and the largest foreign holder of U.S. government debt. For the U.S. and European nations, the historical difficulties that manufacturers have had in entering China have put them at a competitive disadvantage. For China, a downgrade in the U.S. credit rating could devalue their Treasury holdings.
As you mentioned, TAO has been performing well and is currently the only China real estate ETF in the market. Over its five year history, it has outperformed during periods of strong markets in China and conversely underperformed during more challenging periods. For broader exposure to the Chinese equity markets, we offer investors the Guggenheim China Small Cap ETF (HAO) and the Guggenheim China All-Cap ETF (YAO).
In addition to equity based ETFs, several products have launched in the past year providing access to the Dim Sum bond market including the Guggenheim China Yuan Bond ETF (RMB). The Dim Sum bond market is comprised of renminbi denominated bonds issued in Hong Kong. The availability of these products signals the continued liberalization efforts by China to open portions of its markets to outside investment.
The BulletShares ETFs take a unique approach to bond fund investing. What’s their strategy?
Fixed income ETFs have become an important access point to bonds for many investors. And similar to their equity counterparts, fixed income ETFs offer a low-cost, fully transparent alternative to bond mutual funds as well as individual bonds. Until recently, strategies such as setting up a bond ladder, or targeting a specific point on the yield curve, have been difficult to replicate through ETFs.
Guggenheim created BulletShares ETFs as a way to offer investors solutions to these problems. BulletShares ETFs are structured to track an index comprised of bonds, as well as to mature in a targeted year. Unlike traditional ETFs, which have a perpetual life, defined-maturity ETFs have a specified maturity date established when the ETF is launched. When the fund reaches that maturity date, the fund’s final net asset value (NAV) is returned to the current shareholders. This pre-defined maturity date allows investors to create portfolios that can do the following:
- Ladder a portfolio
- Fill maturity gaps in an existing portfolio
- Obtain targeted yield-curve exposure/manage interest rate exposure
- Manage future cash flow needs
These benefits are in addition to the low-cost, fully transparent, tax efficient, and tradable structure provided by ETFs in general. The Guggenheim BulletShares suite is comprised of eight investment grade corporate bond ETFs and six high yield ETFs with maturities spanning 2013 to 2020.
As of this interview, three BulletShares products (BSCB, BSCC, BCJC) have reached successful maturity, demonstrating that defined maturity ETFs can be a powerful and effective way to manage to specific investment goals. As proof of their usefulness to investors, the BulletShares lineup has enjoyed explosive growth of over 127% for the twelve months ended 02/15/2013, with now over $2 billion in assets.