ETF.com: What do you see as the opportunities now? Because we just talked about the risks, which seem multitude, but what are the opportunities?
Kotok: There are a couple of themes that I think are at work that aren’t going to be derailed by the Trump administration or the activities that we see. The first one is an easy one. We know the administration leans in favor of domestic energy. That's pretty apparent. Now, what the nuances and details are, I'm not sure.
So we have two ETF positions—the First Trust Natural Gas ETF (FCG), with natural gas domestic; and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), because we think it's more heavily concentrated on U.S. domestic exploration. And it's a pro-energy portfolio position.
Rationale? Oil prices, energy prices seem to have bottomed or near-bottomed, and the U.S. government is going to be friendly to the industry, not adversarial, which the Obama administration was for eight years. So that's a pretty clear theme.
Another good theme is the changes in banks and banking. The administration under Trump is likely to be less hostile or more friendly. Interest rates and the construction of interest rates in the world have been altered so that the large bank deposit gatherers have an advantage in a world now, where the rest of the financial community doesn't have that access. So the PowerShares KBW Bank Portfolio ETF (KBWB) is a position in our portfolio, and it captures the big banks, because they've got 75% of the deposits. They're the asset gatherers. And they have footing.
Now, the flip side of this is, what do you do with income-oriented things like utilities where we don't know what the tax treatment will be? Imagine what happens to the utility sector if the corporate tax rate goes down and the deduction for interest is eliminated. In the utility sector, you've just imposed a tax increase. You've just raised everybody's electric bill to pay for it in rate recovery.
The dynamics of the details become very important in themes like utilities and interest rates and taxation. They become less important in the themes where you have a general trend that's favorable, like with the energy sector.
ETF.com: Why do you favor passive management for your equity exposure?
Kotok: We actively select the ETF that’s the construct of the portfolio, so the ETFs enable us to create portfolios any way we want anymore. I would say our approach to the stock market is active, and the vehicle is not individual stocks but ETFs.
It’s entirely different in bonds. We don’t use very much in the way of ETFs for bonds. We do separately managed accounts very specifically to try to address client needs. And we're now the manager of a bond ETF, but because we're the manager, we can’t use it and we can’t buy it ourselves.