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January 22, 2015 at 02:41 AM
The 19th century British prime minister Benjamin Disraeli famously quipped: “When I want to read a good book, I write one.”
Today, an enterprising financial advisor with a strong investment thesis, loyal client base or unique niche could similarly say: “When I want to invest in a good ETF, I launch one.”
As Bill Smalley, president of ETF Issuer Solutions (ETFis) puts it:
“ETFs are the most easily ownable vehicle out there today,” he told ThinkAdvisor in a phone interview.
ETFis is one of several firms — others include Exchange Traded Concepts and ETF Managers Group — that provide ETF-in-a-box solutions for financial advisors and others who want to quickly commercialize an investment idea.
In the same way that Amazon and many other vendors help authors with literary aspirations publish and distribute their own books, the private-label ETF firms handle the product registration, recordkeeping and other administrative aspects of operating an ETF.
It is not uncommon for retail advisors to harbor visions of investment stardom by coming first to an idea whose time has come; for example, cybersecurity is du jour, and indeed the International Securities Exchange (ISE), another ETF player, just launched PureFunds’ HACK cybersecurity ETF in November.
But Smalley of ETFis advances a unique insight of relevance to ambitious advisors, framing the move in quasi-succession planning terms as a means “to keep assets in house in way that is not dependent on the person running the firm,” he says. “An ETF is clever way of running the firm in perpetuity.”
Smalley says about half of his firm’s client base — who serve as subadvisors under his firm’s registration and distribution umbrella — are RIAs who have branched out into separately managed accounts (SMAs).
But advisors should know that ETF white-labelers are not the only way to create your own funds. S&P Dow Jones Indices is but one prominent index vendor hawking its wares at ETF.com’s annual InsideETFs conference convening Sunday in Hollywood, Florida.
Roger Scheffel, also attending InsideETFs, runs Wilbanks Smith & Thomas (WST), an RIA with a significant SMA business. The Norfolk, Va.-based firm manages some $2.5 billion in assets under management, about two-thirds of that through its wealth management business and one-third of that through its asset management side.
Scheffel has taken a custom-index, rather than ETF, approach in creating his funds, working with S&P Dow Jones Indices to create rules-based “tactical specialization” portfolios that would aid advisors seeking to create an investment “overlay.”
Say an advisor has $1 million to invest for a client in an example Scheffel says is overly simplified to aid in understanding. The advisor may want half of that in U.S. large-cap equities, but rather than put all of that in the appropriate Vanguard or iShares ETF, he could keep half of that in the standard ETF and the other $250,000 in Scheffel’s tactical fund.
S&P helped him build an entirely different kind of U.S. large-cap equity fund. They started by rejiggering their S&P 500, which is market-cap weighted into an equal-weight fund. So Apple, the index’s largest component, now has the same weight as its other 499 stocks — that is, 0.2%.
“That pushes the S&P to small-cap and value,” Scheffel tells ThinkAdvisor. “We like those tilts based on [Eugene] Fama studies.”
But on that equal-weight chassis, Scheffel’s rules call for eliminating four of the S&P 500’s nine sectors based on quantitative criteria indicating poor future expected returns. That, in essence, is his approach to alpha generation.
“The reason we like to run quantitative strategies is that we give you a rule set and we always follow those rules,” Scheffel says. “If I’m an active [mutual fund] manager managing a fund while going through a divorce or with a kid sick at home, I may make weird decisions; but [advisor using WST funds] can rely on the fact that whatever I’ve done in the past, I’ll do in the future [no matter what].”
S&P custom indices product manager Michael Mell helped Scheffel create his rule-based indices. Mell, also at InsideETFs, says his firm has recently seen 200% growth in the scope of work being performed for the RIA and financial advisor community.
“We serve a powerful function for them as a branding tool,” he tells ThinkAdvisor. “If you’re a new entrant to the ETF marketplace, you need a way to distinguish yourself and you need credibility,” something that using “an agent of repute” provides.
