ETF Advisors Breaking Away

July 06, 2015

The guiding light there is Chief Investment Officer Corey Hoffstein, whose intellectual gravitas belies his still-boyish demeanor. As he tinkered on a computer managing his own modest portfolio in his dorm room at Cornell University, and wrote the software that became the backbone of the Newfound approach to constructing and managing risk in portfolios, it was always with ETFs in mind.

"Millennials aren't looking to beat the benchmark anymore; they have more of a financial planning mindset," Hoffstein said of a cohort that has seen two nasty bear markets in less than a decade. "It's not about alpha anymore. It's about achieving their wealth needs, and active risk-managed strategies that focus on capital preservation are very strongly tied to that millennial mindset that was created by the dot-com bust and then the financial crisis."

A Holy Grail Called 401(k)s
Mike Venuto, chief investment officer of New York-based Toroso, said the seed of the idea to start the firm came in 2008 when he was at Horizon Kinetics, overseeing private client portfolios. Venuto says the portfolios were massively overconcentrated in too few individual stocks, hurting them significantly in the crash. A collection of transparent, liquid ETFs would have cut those investors' losses, he adds.

"ETFs are amazing tools and, if you use them properly, you can express just about everything today and in five years everything," Venuto said, noting his business is built on deep fundamental research surrounding particular ETFs and on a focus on asset allocation with shorter time horizons.

Toroso's big idea is to market ETFs in 401(k) retirement plans using collective trusts—401(k)s being the holy grail of the ETF market's penetration into the world of mutual funds. More than half of the firm's $75 million in assets are in this realm.

Cool New Products …
Beyond the independence ETFs have given advisors, ETF strategists themselves are creating their own funds, particularly in the realm of fixed income.

RiverFront, for example, was instrumental in designing and providing seed money with client assets for both the PowerShares Senior Loan Portfolio (BKLN | C) and the Global X MLP & Energy Infrastructure ETF (MLPX). Both are designed to diversify sources of income for investors anxious about both paltry bond yields right now and heightened risks of capital losses as rates start to head higher.

A number of ETF strategist firms have also put their own ETFs into play—among them RiverFront and Sage Advisory Services in Austin, Texas, both of which market their own bond funds. Even Kotok's Cumberland—a firm with deep expertise in the municipal bond world is now planning to market an actively managed muni-bond ETF that will show off that expertise in an ETF wrapper.

… And Their Dangerous Cousins
Still, the overriding concern among advisors who have made the leap to independence on the back of ETFs is that some of that innovation is simply not sensible for investors. It's overly complex both in structure and in purpose, undercutting the transparency that's at the very center of what makes the exchange-traded fund so powerful.

"My conviction on ETFs has grown for the last 15 years—no question about that," said Cumberland's Kotok.

"The issue now is about opacity," Kotok added. "The list of opaque ETFs is growing. They are not transparent, and they are being bought by people who don't understand what they own, and therefore are making investment decisions that are uninformed. And that's because an ETF sponsor always has to keep finding a new hook."

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