Kotok: Be Nimble At Markets' Turning Point

February 07, 2017

Cumberland Advisors’ Chairman and Chief Investment Officer David Kotok spoke with ETF.com at Inside ETFs about the long-awaited launch of the first ETF to be managed by him as well as how investors should approach their portfolios in the current investment environment, among other topics.

ETF.com: I think a large part of the ETF industry has been waiting for a while for an ETF managed by you. What precipitated the launch of the Virtus Cumberland Municipal Bond ETF (CUMB)?

David Kotok: We've been in this discussion for several years on an actively managed muni ETF, and CUMB now exists. We’re applying what we've done for years to the management of it, within a set of rules, because it's a lot different from a separate account.

But we got there. It's been a long road. I don't know what to say other than we're kind of excited about it. We think we can use the tools we use to manage munis actively.

Whether we can apply them within the constraints of the rules that we have to operate within [for the ETF]—which is entirely different than a separate account for a resident of a single state with certain criteria—remains to be seen. But we think we can. And we think we can add value, and we're going to know soon enough.

ETF.com: What’s so great about the ETF structure for your purposes?

Kotok: I think there's a case that can be made to distinguish an ETF from a traditional mutual fund for munis. Now, the third alternative is to have a separate account. In other words, be your own mutual fund. And we do a lot of that now.

But if you look at the construct of a traditional mutual fund, when it has a redemption, for whatever reason (people want out, they get afraid, they need the cash), but more importantly if it's driven by an event (whether it's an election or a crisis or some financial catastrophe or something else that scares them), in the traditional mutual fund system, the shareholder gives notice and says, “Give me my cash.” The fund manager must raise that cash and pay that shareholder tomorrow.

If it's a bond portfolio, a muni portfolio, that manager has to sell into market conditions that are not liquid. Not only that, but say the fund is Fidelity, and there are redemptions that are systemic. There's no Vanguard to do the other side of the trade.

So the ETF is a different animal. The ETF has a creation unit in it that can take effect. But as a practical matter, the pricing of the ETF when there’s a drift from a net asset value protects the long-term owner. Because, if you think about the redemption, the [mutual fund] manager sells, raises the cash and pays the exiting shareholders. What about all the rest of the shareholders? And if everybody redeems, you have a full catastrophe.

I think the ETF has a built-in cushioning mechanism that a traditional mutual fund doesn't have. And we're going to test it ourselves, because actively managed, total return muni ETFs are rare; there aren't many of them. We've been doing that in separate accounts for a long time. But to do it in an ETF, we'll see how it goes.

 

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