Shark Tank's O'Leary On ETF Investing

July 06, 2017

Kevin O’Leary is best known as one of the hosts of “Shark Tank”—aka “Mr. Wonderful”—but beyond deciding what new entrepreneur to fund, he is the chairman of O'Shares, an ETF provider that launched its first fund two years ago. sat down with O'Leary to discuss his conservative brand of investing, as well as some current macroeconomic topics. Stocks are at record highs and volatility is near record lows right now. A lot of people are talking about how valuations for the equity market are stretched. As an investor, does that concern you, or change the way you position your portfolio?

Kevin O'Leary: No, because in my mandate, I'm invested 100% all the time. My job is to find ways to diversify my risk and reduce volatility. Exchange-traded funds—and particularly new smart-beta or rules-based ETFs—do exactly that.

I can get both sectoral and geographic diversification using ETFs. I’ve been an investor for a long time, and the reason ETFs have the fastest-growing fund flows of any asset class globally is because they’re serving investors so well.

What's happened over the last 15 years is we've gone from some very basic market-cap-weighted funds like the SPDR S&P 500 ETF (SPY), the PowerShares QQQ Trust (QQQ) and the SPDR Dow Jones Industrial Average ETF (DIA) into very sophisticated products that can be designed to do exactly what investors want.
A product like the O'Shares FTSE US Quality Dividend ETF (OUSA) de-risks the S&P. I'd rather own OUSA than SPY, because two-thirds of the stocks inside the S&P 500 I don't want to own. I'm very focused on de-risking my portfolio.

For example, I don't want companies that use sales accruals. I don't want companies that use debt to maintain dividends or grow them. I don't want companies that have slowing return on assets. Those are all rules incorporated inside of OUSA that protect me as an investor. Do you believe these factor-based products you have at O'Shares are superior to the traditional market-cap-weighted indexes?

O'Leary: I don't say they're superior; I say they achieve my objectives—which are far more conservative. I need to de-risk a portfolio because I don't have the option of going to cash. I'm always invested, so I would much rather own much higher-quality companies.

When the sell-off occurs, when you apply the rules I talked about, instead of suffering the entire drawdown of the market, you're protecting yourself. Maybe you only get 50% or 60% of the drawdown. On the other hand, you never get 100% of the upside.

These new products do a masterful job of protecting capital for long-term mandates and people who are extremely conservative investors. It's clear you're quite conservative when it comes to long-term investments, and that's your philosophy behind O'Shares. But do you speculate in the market as well?

O'Leary: Yes, I do. I consider “Shark Tank” to be the ultimate speculation. I've got over 50 private companies now, and there's a lot of volatility in those. But when it comes to protecting the money in my family trusts, I obviously don't put venture capital in there.

The majority of what I invest in is extremely conservative, because I'm trying to protect wealth that took me a long time to build. What's your take on the current macro environment in the U.S.?

O'Leary: The underlying economy before Trump implements anything is actually doing quite well. I get a pretty good sense of all the sectors from the private companies I own, and I can see we're having a good year in terms of revenue and revenue growth. I'm quite optimistic about the domestic economy.

Obviously, Trump's agenda has been stymied by the sausage-making Washington really is. But most people—and I'm included in this—believe that some time in 2018 we’ll get corporate tax reform because that's a bipartisan objective. What it actually looks like is yet to be known.

I don't know if the health care mandate is going to get solved or not. But if it doesn't on this next round, I think they'll drop it for now and just go on to corporate tax and infrastructure, which the market anticipates will happen. That'll serve everybody well, because that's something that has to happen to get the U.S. back to 3% GDP growth.

We also have to deregulate not only at the federal level, but at the state and municipal levels. What I'm suggesting, and am certainly an advocate for, is that any regulation at any level has a sunset period of five years.

In other words, if you look at all the regulations on the books in states like California or Massachusetts or New York, they've been on the books for years, if not decades. Some of them aren't applicable anymore and should have been removed, but because of the nature of how they're implemented, they're not.

I would propose that any regulation has to be removed after five years, unless it's reinstated for good reason. That forces you to revisit all the assumptions made five years previous. That would really be helpful, because it's very hard to start small businesses in California, for example.

That's why I argue the reason we have 100 basis points less growth is because if you try and open a restaurant in Aspen or San Francisco, it might take you three years. That's 15 or 20 jobs that didn't come into the economy. We've got to fix that; it's really broken.

Contact Sumit Roy at [email protected].


Find your next ETF