Active At The Core Of AdvisorShares

June 24, 2019

[This article appears in our July 2019 issue of ETF Report.]

ETF issuer AdvisorShares has 16 U.S-listed ETFs with assets under management of more than $640 million, and an average expense ratio of 1.06%, according to FactSet. That pricey expense ratio comes with active management, the backbone of its ETF family. The firm’s most recently launched fund was the AdvisorShares Pure Cannabis ETF (YOLO), in April. We spoke with AdvisorShares founder Noah Hamman, who has extensive experience in the financial service and ETF industry, to discuss his firm’s approach to the ETF space.

In the broad world of the ETF issuer landscape, what is AdvisorShares about?
AdvisorShares is about active management—strategies that do something and react to markets, depending on what asset class and approach you’re taking. From there, in terms of what kind of issuer we are, I’ve always referred to ourselves as a platform.

I use iTunes as a comparison. We see ourselves as that platform which offers the opportunity to work with some of the biggest artists: We want to do that, but we also want to work with local bands that we think could be talented over time. And it’s incredibly challenging, of course.

How does that relationship work?
I’d say it’s different for each one because it’s not just people pitching us; it’s us going out and looking at ideas, especially when I think about our early days when no one knew who we were. We’d look for the people that spent their time trying to generate brand awareness around themselves; the kind of firms you see on CNBC that aren’t national brands, per se, but are taking time to expound their expertise.

We looked at those people and said, if they’re taking time out of their day to promote themselves, their investment approach, their investment philosophy, we’ve got a way to take them nationwide.

So all your funds are active management?
Right, which doesn’t mean they can’t be systematic and quantitative; they can be that. But they’re active; the manager has discretion.

What makes you different from a white label ETF issuer, where you’re leasing the SEC exemptive relief to issue an ETF?
Going back to the iTunes example, you’ve got talented musicians, but they’re not marketers and they’re not salespeople. And I saw that a lot in the mutual fund series trust space.

My experience before this is working with a series trust and starting an investment strategy. And I would see a ton of managers that would be on that series trust platform that all had the same sort of dream—package up what they do and grow it. But they’re portfolio managers, not marketers.

So, in building this business model, in many ways, we’re trying to build a better solution to that. We would invest our money into the marketing and distribution. They would certainly have to invest their money and time and effort into building the product itself as well.

And if all those things worked—the performance, and our efforts—you’d have a successful opportunity with all the benefits of the ETF structure.

How are you funded? Do you have venture capital?
We had an initial, early-on seed investor, but probably about two years ago, we bought them out.

How do you distribute and sell your products?
Our primary focus is the financial advisor [FA] space. We break the channel into institutional and FA, which is really retail; they’re servicing retail customers most of the time, and then going directly to the self-directed investor. We’re just too small to have any real reasonable effort to go over self-directed investors; those are the firms that can afford to put out the Super Bowl commercials.

I don’t know if “too small” is the right word, but we don’t have the background and expertise to navigate the institutional channel. That’s where relationships really matter. If you look at our bios, we’ve done this in the FA space for a long, long time.

Let’s talk about your recently launched marijuana ETF, the AdvisorShares Pure Cannabis ETF (YOLO). You worked closely with the custodian. When you started tackling this, what were your concerns?
Several people had approached us about it. I went back and looked at old emails, and it goes back two or three years ago, where people are asking about it. We looked at the space and said, “Nah, it’s all OTC [over-the counter trading]; it’s all highly illiquid stuff.”

But the space has changed so dramatically, and our first foray to get into it was actually with the AdvisorShares Vice ETF (ACT).

That was where we learned where the real operational challenges would be in building [a product like YOLO]. And for us, it actually wasn’t, at least early on, with the SEC; it was really with the banking piece and what you could and couldn’t hold.

ACT launched with a very strict limitation and a very strict view of what cannabis-related companies you could have. So we could put in [a stock like] Scotts Miracle-Gro, which we did because some people view that [as being] in the space. I wouldn’t describe it for me personally as a strong one in that category.

We were also able to put in some of the biotech companies where we could demonstrate they had a DEA [Drug Enforcement Agency] license to handle the cannabis. And so those we definitely liked a lot more.

 

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