I should have known because we stopped sending press releases.
This was back, I don’t know, 2012 or so. I was working at the New York Stock Exchange and my clients were ETF issuers. My job was to move the ball forward on market structure initiatives, help issuers get product filings through the SEC 19b4 process, and to generally keep clients happy. The easiest way to keep clients happy was to leverage the NYSE brand to help them promote their funds. And the easiest way to do that was to send out our own press release when they launched a new fund to help get them some media exposure from the trading floor. Or to at least look like we were trying.
We were launching over 200 products a year, and one day our internal communications manager insisted that we stop sending ETF launch press releases. It was hard to disagree when she explained that her media contacts were threatening to exile our email account to the spam box and that an ETF launch was no longer news. Her media contacts were pleading with her to stop sending the press releases, so we obliged. And whatever obvious signal that was to me that the ETF market was becoming saturated clearly went over my head.
As ETF assets continue to explode, the individual new ETF success rate continues to decline. Getting an ETF off the ground requires a two-pronged attack where intra-day liquidity is built in one market and buy and hold assets are built in another. Meanwhile, wirehouse gatekeepers are preening the trees just as RIAs are instituting asset minimums to manage the bombardment of issuer pushes. I’m not going to lie, it’s tough out there.
The Kaufman Foundation (I know, I know) ran a study in 2009 that found that 47 of the Fortune 100 companies were founded during a recession. It is a fascinating study, because it shows that companies that have an easy road during their early years become complacent while companies that have it hard learn to fight, learn to be efficient, and learn to focus on what matters.
We launched Exponential ETFs in 2016, squarely in a bull market for equities, and an extreme bull market for ETF products specifically. So I like the fact that it is tough out there, that we are being challenged and earning our battle scars. We are surviving, we are learning, we are adapting… and soon enough we will be thriving. And if I take my own biases out of it, it SHOULD be tough out there. We are creating investment products for financial professionals who in turn are providing fiduciary services on behalf of real people who have scraped and clawed to save and invest that money. They ate dinner at home instead of going out, they passed on the luxury options on their new cars, they vacationed in Phoenix instead of Maui. They worked hard, year after year, and they saved. So in walks the fund industry telling their advisors that there is a new and exciting way to invest – be skeptical! Be thorough! Be cautious!
Tadas Viskanta writes a fantastic blog called Abnormal Returns. He recently put up a post asking some of the best minds in the industry “What ETF, if it were launched tomorrow, would you invest in with little (or no) hesitation?”
The responses were dispiriting, to say the least. Here is a sampling:
- Robin Powell: “It would be refreshing to have a day without another ETF launch!
- Charles Sizemore: “We arguably have a bubble in ETFs, indexing in general, and even in smart beta.”
- Tom Brakke: “There are too many already.”
- Cullen Roche: “The ETF market is becoming saturated.”
Like I said, it’s tough out there. I had lunch with one of the bloggers from that post about a month ago, someone who I am a big fan of and who I consider to have the perfect balance of free and creative thinking mixed with critical quantitative analysis, and there was one offhand comment during the lunch that just stuck with me and I haven’t been able to shake it off.
I was explaining our new fund launch and our company plans and he said “well, if it works out, you’ll be on a yacht somewhere”. The comment caught me off guard and I just shrugged and agreed in the moment. But it stuck with me because it is such a different point of view than the one I have.
Ending up on a yacht somewhere would be lovely. But that has never been the motivation behind anything I have done or any product we would ever launch. So it stuck with me and I have been at a loss for how to respond. We are in an industry where some charge a 20% performance fee for fund management – with lockup periods and opaque investment methodologies. Exponential ETFs charges 29 basis points for one of our ETFs and 65 basis points for another (which utilizes proprietary data that carries tremendous fixed costs). Our ETFs are fully transparent and designed to withstand the toughest institutional scrutiny on the planet. If we were in it for the money-grab we would be the most incompetent hucksters on the planet.
Let me take several steps back. I grew up a smart ass kid with severe ADD and a disdain for authority, in an environment where there was an emphasis on book learning in schools run mostly by rigid, humorless Rabbis. These two things do not mix. But after serving in the army and learning how to push myself, I went about giving myself an on-the-job education. I started my career as a stock trader, and then on an FX desk working the graveyard shift, and then a product developer. I was blessed with those opportunities and I threw myself into it with everything I had. Even more so, my good fortune landed me in the ETF industry right at the beginning. ETFs are in my blood; I love this stuff*.
*Yes, I love ETFs, and my favorite ETF was always the simple elegance of RSP. Until I level-upped it, which is exactly what we did.
Exponential ETFs was born at the collision of two different paths. Here is one path: a mundane shopping experience led me to the big idea that direct customer experiences in any industry will eventually show up in a company’s bottom line, and I went about looking for data to test that thesis.
Kevin Quigg had overseen one of the most successful expansions of a fund business ever, and was ready to get back to the point where the job was fun and free from bureaucracy. Charles Ragauss was the hardest working portfolio manager in the ETF industry and had just seen his newborn ETFs sold to a firm on the East Coast. Josh Blechman went from being a hedge fund trader to mastering an entirely new skill set. What Qiao Duan had to go through to be a part of this is a blog post I’ll save for a future date.
Meanwhile, the other path, Dr. Claes Fornell had a problem. He went from being one of the premier academics in the country (the author of three of the 20 most cited marketing science papers published in academic marketing journals… and five of the top 50) to being one of the premier entrepreneurs in the country (founding ForeSee Results, CFI Group, The ACSI & Detroit Vineyards). But, his two hedge funds which utilized his customer satisfaction data had three sovereign funds as investors, and those investors were starting to grumble about the fund structure – everything I mentioned: the lockups, the performance fees, the opaqueness.
And then out of the blue some kid cold-called him with a big idea.
Take a look around the ETF industry, because it’s not just us. Something special is happening. Eric Ervin found a way to isolate and optimize dividend investing. Gregg King found a brilliant way to embed a gold investment into an equity position. Jamie Wise built a proprietary data scraping tool that is generations ahead of those used by 2/20 hedge funds. Christian Magoon launched a retail ETF that demolishes any other in the category. Mike Venuto did the same in the financial sector. And these funds are available in the most efficient wrapper, at the most efficient prices. I could go on, and I know I am leaving many out, but it is the same story over and over.
None of these people are selling ETFs because well paid consultants advised them that flows are moving into the vehicle. These are fund strategies built by passionate people who believe in them. Every one of those entrepreneurs has had to fight and sacrifice and grovel for funding, beg for allocations, miss their kids’ soccer practice and lose sleep to create these funds. After all, it’s tough out there.
So where two products diverge in the wilderness, if you insist that only the most well-travelled are worthy of consideration, my ask is that you at least open your mind to the possibility that a better solution could one day be out there. Stay cautious and skeptical, by all means, but also stay open minded to the possibility that someone could build something better for your clients and better for your portfolios, and it just might be sitting out there on the road less travelled.
Posted by: Phil Bak 04/22/2018
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