A Newcomer Takes On The World Of ETFs

February 18, 2015

 

(Editor's Note: This article first appeared in ETF Report magazine.) 

 

The arrival of New York Life to the world of exchange-traded funds is an event investors everywhere would be wise to follow closely. The mutually owned insurance company is buying Rye Brook, New York-based IndexIQ, a firm known for hedge fund replication ETFs such as the nearly $1 billion IQ Hedge Multi-Strategy Tracker ETF (QAI | B-73). While IndexIQ is sure to bring New York Life instant critical mass in the growing area of liquid alternative ETFs, Drew Lawton, head of New York Life Investment Management, made clear in an interview with ETF Report that his company is at the start of a broad push into ETFs. Lawton’s unit is already behind New York Life’s MainStay brand of investment products, and given the company’s considerable distribution strength, it’s clear that New York Life, MainStay and—not least—IndexIQ are likely to become important parts of the ETF ecosystem in the coming years.

 

 

How did this IndexIQ deal come to pass?
We’ve been tracking the ETF space for some time, but typical of New York Life, we’ve always been selective about the partners we do business with, and really want partners who are innovative in their space. And that certainly applies to Adam [Patti, chief executive officer and founder of Index IQ], in that he and his associates fit very well—they’re innovative. We think they have a value proposition that’s sustainable over time. We also think they’re a very good cultural fit to New York Life in that they’re always putting the client first in their business dealings.

 

 

Let’s talk about Adam’s value proposition. In your press release announcing the deal with IndexIQ, you seemed to be suggesting this liquid-alternatives space in the exchange-traded fund world was a good beachhead in a world of ETFs that, overall, is prospective. Can you develop that idea? 
Well, we see both the ETF space and liquid alternatives as being two very important growth opportunities in the marketplace. ETFs in this country have grown to almost $2 trillion today and to $3 trillion worldwide. We’re obviously very interested in that.

 

We’re also very interested in what’s been happening in alternatives over the last several years, certainly since the financial crisis—and more specifically, liquid alternatives. And we see interest in both ETFs and alternatives continuing to grow in the future. The fact that IndexIQ really sits at the intersection of those two growth trends was very interesting to us, and one of the reasons we were attracted to Adam and his team.

 

 

Would you describe what “liquid alternatives” means to you? There’s some room for interpretation there. 
Why don’t we take both words separately: On the alternatives side, you’re right; the word “alternative,” in our business, has a number of different interpretations by industry participants, whether they’re clients, advisors, consultants or investment managers. I think we look at the alternatives space quite broadly, in that asset classes or investment disciplines that don’t correlate directly to particularly the U.S. equity and fixed-income markets begin to move into that definition of alternatives for us.

 

So we include not only hedge funds but real estate, commodities and a number of other asset classes and disciplines. It’s that correlation component of alternatives that’s most interesting to us, because we see alternatives as not only an interesting asset class on an absolute basis, but it also represents opportunities for us to educate our advisors and clients about the role that uncorrelated, noncorrelated or less-correlated assets can play in a portfolio.

 

 

What about the “liquid” piece of “liquid alternatives?” 
The liquid piece is important, particularly to the retail investors that we serve through our advisors. Liquidity—both on an absolute basis and then as it relates to more illiquid assets—is a concept we’re trying to educate our clients and their advisors about, specifically the role that potentially each of them can play in portfolios. So this notion of liquidity and the educational opportunity it represents is, in some ways, as important as the opportunity we have with alternatives as well.

 

 

I’m wondering if you might wax poetic about ETFs to the extent you’re willing or able. And if you’re willing, be sure to contextualize New York Life’s place in ETFs.
Well, most new products go through an evolutionary process, and we’re seeing the same thing with the ETFs. Early-mover ETFs were designed for and arguably served a certain purpose. The marketplace responded to those, gave its feedback. Those who offer ETFs took that feedback, and some made adjustments and came out with a second generation, and we’ve seen subsequent generations from there. And I would imagine this evolutionary process should continue as the demands of the marketplace become more refined.

 

 

Are you alluding to relatively new developments in ETFs like liquid alternatives, “smart beta” and strategy indexes? 
Absolutely. I think the “smart beta” products are an excellent example of what I’m saying. And now as we think about active ETFs, we’re looking at transparent versus nontransparent. And all these changes put a premium on education in the marketplace. We have to make sure the individuals we’re talking to about ETFs fully understand not only the details of the structure but how they can or should best be used in a portfolio.

 

And we’re not offering a strong opinion about whether ETFs are better than mutual funds, or better than separate accounts or any other structure. Our approach through this IndexIQ acquisition is to broaden the product set that we can deliver to our clients and their advisors. And when I say “broaden,” it’s by investment discipline, by asset class and by product structure.

 

 

Do you intend to plumb the vast breadth of the ETF world, not just the hedge-fund-replication space that Adam has been plying?
One of the reasons we’re attracted to IndexIQ is not only do we respect the products that they’ve already launched and the track records they’ve generated for those products, we’re also very attracted to some of the product ideas they have in the pipeline that would be available for launch some time in the future.

 

And we’re also attracted to the “optionality” that IndexIQ’s exemptive relief brings to us about potentially creating ETF products from investment management boutique firms that are already within the New York Life investment management family.

 

 

When you say “optionality,” you mean using IndexIQ’s exemptive relief for other New York Life subsidiaries to bring their own ETFs to market? Can you throw out some entity names that might do this?

 

You’re more or less on the mark. Probably the best known of the group is MacKay Shields, which is a nearly $100 billion fixed-income manager in New York that offers high-yield fixed-income products.

 

 

Whatever you end up doing, the exemptive relief is broad—equities, fixed income, U.S., international, fund of funds, derivatives, active and passive, and even indexes created in-house—“A to Z,” the way I see it. 

 

It’s very broad. And I give Adam and David [Fogel] and the team a lot of credit for having the foresight several years ago to begin their work with the SEC to achieve that broad platform of exemptive relief. I don’t believe there are many other firms in the marketplace today who can compare from a broad exemptive relief standpoint. So it truly is one of the attractive features of the firm for us. Adam and the team have put the vast majority of their efforts and resources into product development and product management, rather than distribution.

 

 

Can you comment on Adam himself? He’ll remain CEO after his company becomes a unit of New York Life. 
I have great respect for him. I find him to be very forward-thinking, very creative. And as I said to him directly, we will learn from him in the months and years ahead. He has made the same statement about us, but we’re very confident that he’ll be an important part of our firm, not just for what he brings given his experience with IndexIQ, but the talents and the capabilities of the man will make us better as a firm going forward.

 

 

And the IndexIQ brand will live within the New York Life universe and be nurtured? Or would you explore “optionality” a little bit more aggressively? Or all of the above?

We absolutely want to nurture the brand. We also have a brand that is gaining recognition in MainStay. So we frankly want to try to leverage those two brands. I’m not sure exactly how we’re going to do that going forward, but we think we have two very strong brands we want to leverage.

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