Innovation in the exchange-traded fund industry had stagnated; fresh thinking was overdue, Bruce Bond, ETF pioneer and co-founder of PowerShares, argued a few years after selling his firm to Invesco. Bond, retired, was busy building a hunting and fishing ranch. The groundbreaker talks about the ETF business yesterday, today and tomorrow in an interview with ThinkAdvisor.
At PowerShares, co-founded with John Southard, Bond created the first smart beta ETFs, the first active ETFs, the ETF of ETFs and non-gold commodities ETFs, among other firsts.
Now unconventional thinker Bond is back, running a new firm and creating new ETFs. Last week his Innovator Defined Outcome ETFs co-won ETF.com’s “Most Innovative New ETF of the Year” award.
In 2006, Bond and Southard sold the market-leading business they’d launched four years earlier to Invesco. By 2009, Bond had stepped down as PowerShares president-CEO.
In 2017, his noncompete agreement with Invesco over, he and Southard bought legacy company Innovator Capital Management to create and market ETFs. Current total AUM: more than $1 billion.
Last August they introduced the Defined Outcome ETFs, a suite of risk-management focused funds that provides buffers to market losses. Thus far, the funds have about $458 million in assets.
The first of their kind, Bond says, the new ETFs allow advisors to better align equity exposure to clients’ risk tolerance level.
In the interview, Bond, 54, forecasts growth in value-oriented ETFs, such as smart beta, and declares ETFs often “a stabilizing factor in the marketplace” and “the way most people will invest for the foreseeable future.”
The first-ever ETFs ever were based on benchmark indexes only. Bond and Southard — whom Bond describes as “a quant” — took the ETF concept further when they created “intelligent indexes” and funds based not just on size or style but on a value proposition. That triggered a parade of new indexes and ETFs, marking the start of smart beta indexing and factor indexing.
ThinkAdvisor recently interviewed Bond, on the phone from his office in Wheaton, Illinois. His early background includes stints at First Trust and Nuveen, where he worked with a broad range of financial products, from unit trusts to closed-end funds to hedge funds. Upon the ETF’s debut, the fund’s fundamental structure flashed huge potential, he says.
In our chat, he weighs in on fee wars and other ETF issues.
Here are excerpts:
THINKADVISOR: What’s upcoming in ETF World?
BRUCE BOND: The benchmark ETFs will continue to get the assets; but you can expect to see continued growth in some of the active value-added sectors, such as smart beta, factor investing, hedged-type equities.
What makes your outlook so rosy?
The ETF structure is far superior to many others because there are significant benefits that can be delivered through it. As long as that remains the case, I see more and more assets moving toward that sector. One of the great things about an ETF is tax benefits. ETFs will continue to be the way most people will invest for the foreseeable future.
Some industry observers blame the big 2010 flash crash on ETFs. Your thoughts?
I don’t think that’s true. Any time there’s a major market disruption, everybody looks at ETFs like, maybe, they had something to do with it. In many cases, ETFs are actually a stabilizing factor in the marketplace.
Do you expect ETF fees to go any lower?
At a certain point, fees are irrelevant. We’re basically at the bottom. I don’t know how much lower they can go. We may see fees across the board continue to compress a little; but at some point, we’ll hit an equilibrium where people aren’t as concerned about fees as long as they’re getting proper value.
Why do you expect value-oriented ETF strategies to grow?
I see opportunity there. When ETFs originally came to market, they rode on benchmark investing. Now that the ETF structure itself has become mainstream, you’ll see more and more value-oriented strategies offered and more assets moving toward those segments.
What do you think of non-transparent ETFs?
There may be some opportunities, depending on when they get approved. The challenge could be if the spreads on those products [for trading] are tight enough to attract significant assets. They’re not tested yet, so it’s hard to tell. There are things to be ironed out to make sure they work.
Why did you retire from the industry in 2009?
When [partner John Southard and I] sold PowerShares to Invesco, I had a five-year noncompete. After three years, I decided to step down as CEO and decide what might be next for me on the horizon.
Why did you return to the ETF business?
After we got out of the market, there hadn’t been a whole lot of innovation in ETFs. There was just a lot of slicing the bologna — but you can only slice it so thin. They were chopping it up into millions of different pieces that they could represent as an ETF, but there wasn’t really a lot of new thinking.
You and John had been working on a new type of ETF when you purchased Innovator Capital Management and soon brought it to market. What’s different about Innovator’s Defined Outcome Funds, the first of their kind, as you call them?
With the Innovator S&P 500 Buffer ETFs [in the IDOF series], think of them as buying the S&P 500 with a downside buffer [to market losses]. You have a certain amount of downside protection if the market goes down. If the S&P 500 goes down less than 9%, you’ll get zero back at the end of the year, even though the market is down. If the market [drops] 10%, you’ll lose 1% in the fund. We also have a 15% buffer if you’re concerned that the market could go down further. And we have a third fund with a 30% buffer that protects you from negative 5% to negative 35%.
What are the drawbacks to these funds?
To have that buffer, you give up some of the upside in the market.
How much do they cost?
Seventy-nine basis points, which is high for an ETF. But it’s inexpensive for this kind of investment. You couldn’t buy this type of performance anywhere else for that price.
What’s your thinking about bond ETFs?
They give people easy access to bonds at a relatively good price. Sometimes they’re actually a better proxy than the bond itself. But we’ve been in a bull market for bonds for a really long time, and it’s come off a bit in the last year as interest rates moved up a little. Now it’s very difficult for bond yields to go down to protect you if [stocks] were to [plummet] just because they can only go down so much.
What’s the bottom line?
At this point, I don’t think bonds provide the counterbalance that many people think they’re going to get if the market goes down. The market will go down a lot more than bonds go up. They’re just not going to provide the barometer that people had hoped they would.
Mr. Bond, do folks kid you about your name?
Yes, my first job out of school, I sold municipal bonds. I got teased a lot about having the perfect name for the business.
Any jokes about being related to filmdom’s Agent 007? There’s that famous quote: “My name is Bond — James Bond.”
People would ask me if my dad’s name is James.
And you said?
No. His name is William.
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