Actively managed ETFs so far in 2020 represent roughly 50% of all new ETF launches—an unprecedented big slice of the pie. They have also attracted about 10% of all net asset inflows this year—a high percentage for a segment that today represents less than 3% of all U.S.-listed ETF assets.
Active management in the predominately passive world of ETFs is clearly making a showing this year.
But whether these active ETFs are rules-based with some form of actively managed overlay or entirely discretionary strategies, all of these funds have one thing in common: an active portfolio manager behind them.
When you buy into an active ETF, you are buying into the expertise, methodology and investment philosophy of its manager. You better believe in what that person is bringing to the table relative to a benchmark. So, who are these managers? We talked to three new-to-ETFs market managers to find out more.
Andrew Mies, Chief Investment Officer, 6 Meridian
ETF.com: What's your investment philosophy?
Mies: What drives everything we do is our focus on the risk-adjusted return we get as investors. It all comes down to what amount of risk we take relative to what we get in return for that risk.
There are a lot of strategies out there offering highly attractive returns, but once you adjust to the amount of risk it took, it’s not always worth it. That core focus on risk-adjusted return drives all of our portfolio decisions.
ETF.com: What's unique about your value proposition? What sets you apart relative to your competitors?
Mies: There are a couple of things that differentiate us. First, the genesis of our firm is a high net worth advisory firm. We are designing with a specific client in mind. We aren’t trying to have a broad-based offering. That’s different from what many other ETF providers offer, because we’re extremely tax sensitive and tax aware.
Our tax sensitivity exceeds most other firms out there. From the rebalancing frequency to heartbeat trades to the elimination of low basis stocks to portfolio choices, we measure ourselves on the after-tax return generated. It’s a different mindset.
There’s always that final conversation about the tax consequences of every decision we make in the portfolio relative to the risk of holding or selling a position. The launch of our ETFs was done entirely to increase the after-tax net worth of our clients—the deferral of taxes is a dramatic benefit for our clients.
Another unique aspect of our business is that, when we launched, we had most of these strategies already with 10 years of history in separately managed accounts, so within 30 days of the launch of our ETFs, we already had $400 million in assets under management.
In doing so, other investors can benefit from the structure that’s already in place and the costs that are already covered.
ETF.com: How do you start your day? What’s a must-do for you as an active manager?
Mies: The strategies we manage in ETF format are driven by a lot of empirical research and data analysis, by backtesting, and by constantly reading new research, trying to find other signals and attributes that we can look into and incorporate into our quantitatively built portfolios.
Our strategies are all quant, focused on high quality, cheaply valued, strong-price-momentum stocks. That’s the entirety of our research effort.
Quick description of the ETFs:
6 Meridian Hedged Equity-Index Option Strategy ETF (SIXH) – $193 million in AUM, 0.81% expense ratio. The biggest of 6 Meridian’s ETFs, SIXH is a U.S. large cap equity ETF holding 40-60 high quality, high profit stocks that also captures volatility premium by selling call options on SPY. The strategy is designed to deliver income, lower volatility and outperformance in down markets in a tax-efficient way.
6 Meridian Mega Cap Equity ETF (SIXA) – $106 million in AUM, 0.82% expense ratio. SIXA looks at the top 10% of the Russell 3000 for the highest quality, profitable names, and ranks stocks based on several factors such as momentum, yield, quality, etc.
6 Meridian Low Beta Equity Strategy ETF (SIXL) – $85 million in AUM, 0.84% expense ratio. SIXL is an all-cap portfolio of some 240 S&P-universe low beta stocks. Multifactor screens inform selection, and ranking takes into account relative market risk/volatility, beta.
6 Meridian Small Cap Equity ETF (SIXS) – $23 million in AUM, 0.97% expense ratio. SIXS is a small cap portfolio picking names from the S&P 600 that are low beta and are also value stocks. Multifactor screens inform selection, and ranking takes into account value metrics and beta.
Michael Loukas, Chief Executive Officer, TrueMark Investments, TrueShares ETFs
ETF.com: What’s your investment philosophy?
Loukas: TrueShares specializes in thematic, actively managed ETFs. The nascent asset classes of the “new economy” offer investors the most favorable environment in which to pursue capital appreciation.
The combination of competitive inefficiency and eye-popping growth potential that exists in these dynamic segments makes them well-suited targets for our active, alpha-seeking investment strategies. We strongly believe that expert navigation of these landscapes is a must, and it’s this belief that represents the backbone of our investment philosophy.
ETF.com: What’s unique about your value proposition? What sets you apart relative to your competitors?
Loukas: Two main things. First, concentrated portfolios. TrueShares constructs concentrated portfolios that are specifically designed to capture the potential alpha of a secular growth story. Relying on our research process, the goal is to choose the winners and avoid the losers in each of the industries we invest in, and in doing so, potentially deliver better long-term results to our investors.
We strive to buy and hold companies with a competitive edge, deepening concentration in the “category winners” as they assert themselves. In our view, long-term concentration in these companies is the most efficient method of capturing alpha in hypergrowth industries.
Secondly, industry-specific subadvisors. TrueShares will only enter an asset class in which we have identified an appropriately capable investment manager. We marry highly credentialed, experienced and industry-specific portfolio managers with deeply knowledgeable industry advisors.
This creates credible and effective investment teams with the knowledge and reach to understand real-time trend shifts in these quickly evolving industries. The integrity and thoroughness of this manager selection process is vital to delivering the true, targeted, actively managed exposure to the modern economy asset classes that our clients have come to expect.
ETF.com: How do you start your day? Coffee?
Loukas: A survey of our portfolio managers will reveal one common theme: Read. Essentially, absorbing information comprises the first couple hours of any given trading day—everything from sell-side research, industry trends and the overnight news cycle to company-specific developments.
The most productive time of the day can be the 1 ½ to two hours leading up to market open. While we prefer secular growth stories that possess long-term growth trajectories, and therefore require less trading, active portfolios are never on auto-pilot. Our portfolio managers need to breathe with the market.
Quick description of ETFs:
TrueShares Technology, AI & Deep Learning ETF (LRNZ) – $12 million in AUM, 0.68% expense ratio. LRNZ invests in companies that its subadvisor, Black Hill Capital, believes have a competitive advantage with respect to the development and use of artificial intelligence, machine learning or other deep learning technologies.
Companies within LRNZ reflect the subadvisor’s belief that the most significant AI corporate growth or hypergrowth opportunities will develop in one of four areas: data, hardware, algorithms, sophisticated AI users (such as cloud computing, cybersecurity, medical research, etc.)
Portfolio construction also revolves around Black Hill Capital’s core philosophy that technology sectors are a “winner take all” environment and new tech cycles will eventually produce one segment “winner.”
TrueShares Structured Outcome ETF Series (AUGZ) (Next Month: SEPZ) – $7.5 million in AUM, 0.79% ER. This series of ETFs uses a “buffer protect” options strategy that seeks to provide investors with returns (before fees and expenses) that track those of the S&P 500 Price Index while seeking to provide an 8-12% downside buffer (with the advisor targeting 10%) on the first of that index’s losses over a 12-month investment period.
The strategy is implemented through the purchase and sale of options on the S&P 500 Price Index or an ETF that tracks the S&P 500 Price Index. While there is no guarantee the fund will be successful in providing these outcomes in any period, the goal is to provide uncapped equity market upside participation (subject to options pricing) with a measure of downside risk mitigation.
TrueShares ESG Active Opportunities ETF (ECOZ) – $5.2 million in AUM, 0.58% ER. ECOZ is a portfolio of large U.S. companies with attractive investment profiles that have also been screened for environmental, social and governance (ESG) standards, including a particular emphasis on carbon footprint.
The portfolio will generally target 75 large cap positions across all sectors, screened for proprietary ESG characteristics that the fund’s subadvisor, Purview Investments, believes are signify attractive long-term opportunities. This evaluation process adjusts for both company- and sector-level ESG characteristics to identify industry champions in ESG parameters.
Jonathan Molchan, Managing Director & Portfolio Manager, Harvest Volatility Management (subadvisor to Nationwide ETFs)
ETF.com: What's your investment philosophy?
Molchan: I come from a quantitative background, with a key focus on risk management. It’s all about quantifying the risk being taken to hopefully secure a positive outcome. The way I look at things is, the market doesn’t always go up, but if you can protect on the way down, you can even out your return distribution over time while participating in markets, meeting key objectives and—most importantly today—being able to sleep at night.
ETF.com: What's unique about your value proposition?
Molchan: Our product was born over the course of years of conversations with advisors and platforms. In this space, some ETFs offer high income and no downside protection; others offer a buffer or a market hedge in times of turmoil, but little to no income. We are combining both of those worlds.
You can generate high dividends, but also have full downside protection, and you’re not incurring cost of carry for that downside protection thanks to an options strategy that combines covered calls and protective puts.
We sell near- to out-of-the-money call options for options premium, and a portion of that is used to purchase out-of-the-money downside puts to protect the portfolio. It all resets monthly to make sure the downside protection is relevant.
ETF.com: How do you start your day?
Molchan: Coming from a quant background, data is key. Reading the news, understanding the latest economic indicators, any shifts in indices, as well as looking at which trends are strengthening and weakening, and how it all comes down to the market price action and volatility—these are the key indicators and inputs I look at every day to manage an options-based strategy. These signals allow me to best navigate market environment.
Quick description of the ETF:
Nationwide Risk-Managed Income ETF (NUSI) – $110 million in AUM, 0.68% ER. NUSI is a full replication of the Nasdaq-100, but with an options overlay, which is the active part, since it can be closed depending on the market environment. In a market that’s flat, NUSI can close out the call options and lock in premium, avoiding the risks linked to a market rise.
In a low-yield world, NUSI is a bond enhancement vehicle from an income perspective. If you’re an equity investor, NUSI also offers you equity exposure with less volatility in the downside. It’s a hybrid ETF that can complement any investor’s asset allocation model.
The ETF is rules-based active, taking out the fear of falling markets, but also taking out the exuberance of rising markets, focusing on the key objectives of income generation and equity participation.
Contact Cinthia Murphy at [email protected]