Behind An ETF Subadvisor

January 29, 2019

Denise KriskoVident Investment Advisory (VIA) is a full-time ETF subadvisor. The firm—a wholly owned subsidiary of Vident Financial—does the day-to-day work of running 40 ETFs from different issuers, including Vident ETFs, overseeing more than $4 billion in ETF assets. It’s a crucial role in the ETF ecosystem that gets little notice from end-investors. Denise Krisko, president and co-founder of VIA, offers a rare glimpse into the often-unsung heroes of ETF portfolio management.

 

ETF.com: As a way of introduction, how has your experience at companies like Vanguard, Northern Trust and BNY Mellon led you to VIA? How did you get involved with the world of ETF subadvisement?

Denise Krisko: I started at Vanguard with index mutual funds. Then I moved to Deutsche [Bank] at a time when Deutsche was subadvising the Fidelity mutual funds. Ultimately, I was at Bank of New York asset management, heading up equity index management, at a time when we started to subadvise the WisdomTree ETFs. They were being serviced by BNY and required some optimization, currency hedging, things that required hands-on portfolio management. That was the genesis of my ETF subadvisory.

Since then, our team continued to subadvise more and more ETFs that were being serviced by BNY. BNY merged with Mellon, so we became part of Mellon Capital. We had over 100 ETFs at one point.

Then, as things changed coming into the financial crisis, I left Mellon Capital and started a firm called Index Management Solutions, which provided management to one advisor's ETFs. Others saw this and said, “Hey, can you subadvise ours as well?” And we did. The business grew a bit unexpectedly and without my really trying to grow it.

Ultimately, Vident Financial became one of our clients. We were subadvising one of their ETFs, and they offered to set up a new firm that would just subadvisor ETFs. They’d be the parent company, and that’s what I did in November 2014. We launched Vident Investment Advisory specifically to provide subadvisory management to ETFs.

ETF.com: At that point, were you subadvising only Vident Financial ETFs, or others?

Krisko: The business began with the then-three Vident ETFs, but over the past four years, it has grown to include over 40 funds with over $4 billion in combined assets.

We’re subadvisor to the ROBO Global Robotics and Automation Index ETF (ROBO); to the YieldShares High Income ETF (YYY), and we're subadvisor to four Nationwide ETFs, among others. Our clients vary in size significantly from very small operations, to Nationwide, UBS and AllianceBernstein, for example.

ETF.com: In the ETF ecosystem, what did you find so appealing about the role of subadvisor?

Krisko: Essentially, we just discovered it. But I came to realize a few things. One, that there was the need for quality services—a lot of firms, large and small, did not want to manage products on their own. Demand was there. And moving away from BNY Mellon allowed us to also become service-provider-agnostic. Among the funds we subadvise, they are custodied at five different custodians, numerous distributors, index calculators, index providers and every combination thereof.

It has interested me, because, with the rapid growth in the ETF industry, there are a number of new entrants, smaller firms in particular, who either don’t have the capacity to manage funds themselves, or just don’t have the expertise. We provide that.

ETF.com: What goes into your role as subadvisor?

Krisko: The role has evolved into providing much more than just simple portfolio management and trading, which is basically the core of what subadvisory is—the day-to-day portfolio management and trading.

But now we also provide assistance with capital markets—the brokers we're trading with all of the time. We know who's offering liquidity. We can bring new issuers to them. We’re close to the exchanges, we're close to different custodians and numerous service providers. We’re in tune with what's happening across the industry. And our reach has become global—we are now managing UCITS ETFs [in Europe] for HANetf.

We have asset management firms with large, established portfolio management and trading desks coming to us for subadvisory because they're seeing the additional benefits of our ETF-specific experience.

ETF.com: Is conflict of interest ever a concern if you subadvise, say, two competing ETFs in a given segment from competing issuers?

Krisko: There's definitely awareness, but no concern. We’ve had scenarios, especially in thematic products, where we've had multiple similar products. As soon as a proposed fund is presented to us that would in any way be similar to or could be perceived to conflict with a fund that we're currently subadvising, we take a closer look at it.

We’ve found that funds that at first glance seem quite similar are often very different once you look at the underlying index methodology and at holdings. We haven't had this problem.

ETF.com: How many portfolio managers do you have working on 40 ETFs?

Krisko: We have seven portfolio managers. They all have ETF experience specifically. They also each specialize in a particular asset class. Index portfolio managers can carry many more portfolios than an active manager could, and of the 40 funds, 32 are indexed.

As we have more and more active funds launch—which we have had recently—the number of portfolios per manager will begin to go down. There is more work required with those, more trading.

ETF.com: What’s your biggest concern as a portfolio manager today? How is your day-to-day different today than it was a year ago?

Krisko: I’d say the biggest difference is the volatility in the market. It creates a bit more oversight and touch management. Even though many of the ETFs we subadvise are index funds, and they may not be trading on many days, there are still a lot of moving parts going on all the time.

There are distributions taking place, expenses that are coming out of the funds. Managing the cash—particularly when there's so much volatility in the market—requires a little bit more effort.

ETF.com: How much of a role do you play in developing a new ETF idea?

Krisko: It varies. People come to us at different stages of the product development cycle. Sometimes they already have their exemptive relief. They have the index, it's already being calculated.

Typically, then, they were going to run it themselves and usually one of the other service providers has said, “Why don't you consider a subadvisor?” So they come to us.

Most clients have the idea developed. They’re working on tweaking it and looking for our assistance on portfolio management and trading. But we can also get involved with the process of discussing index methodology, liquidity criteria, etc.

ETF.com: With 2,200-plus ETFs on the market today, are you still surprised by innovation?

Krisko: At times I feel like the market is a bit saturated. But then someone calls with a great new idea. There’s still room for innovation.

A lot of growth will come from firms that may have existing strategies that they're looking to offer in an ETF format. Perhaps they're currently in mutual funds or separately managed accounts, and they’ll be looking to transition to an ETF for those efficiencies. There are also a lot of areas in the ESG [environmental, social, governance] space yet to be explored.

Contact Cinthia Murphy at [email protected]

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