ProShares Sapir: Defining Alternative ETFs

March 28, 2013

With the fight for market share in the world of pure-beta ETFs all but over, the battle for the ‘alternative’ space has only just begun, ProShares CEO Michael Sapir says.


It’s easy to forget that ProShares is becoming a lot more than the world’s leading provider of leveraged and inverse ETFs. Yes, the lion’s share of the Bethesda, Md.-based firm’s $23.31 billion in assets is in geared funds, but that would be ignoring the suite of alternative ETF products the company has launched more recently, including the $46 million ProShares Hedge Replication ETF (NYSEArca: HDG).

When Managing Editor Olly Ludwig caught up with ProShares Chief Executive Officer Michael Sapir recently, Sapir made clear that he aims to make his company the first one investors and advisors think of when they want to integrate “alternative” investments into portfolios to better manage risk and volatility. And to the extent alternative means different things to different people, Sapir says ProShares, through the products it launches, will be front and center in helping the world of investments formulate the very definition of the word. So what does “alternative ETF company” mean in your mind? That word could mean a lot of things to different people, and to call your company that made me wonder, are you engendering misunderstanding?

Sapir: Our goal is to become the premier provider of alternative ETFs. The term “alternative” hasn’t been defined with finality at this point. But I think what most people can agree on is that it doesn’t mean long-only conventional equity and fixed-income investments.

And I think there would be general agreement that some of the areas that we’ve entered into recently like private equity, hedge fund replication, long/short strategies and merger arbitrage are considered alternative strategies. If there’s a disagreement out there, it’s really around the edges.

I think “alternatives” is somewhat like what the Supreme Court said about some things, which is, “You know it when you see it.” So by dint of what you bring to market, you’re going to help to define what “alternative” means?

Sapir: What we’re trying to do is introduce products that can help lower volatility and reduce risk when introduced into a portfolio over the long run. I presume you define your company’s original initiative, leveraged and inverse securities, as alternatives, yes?

Sapir: I think most observers out there consider geared ETFs to be within the sphere of alternatives. Let’s switch gears here. The ETF industry is 20 years old—SPY launched in January ’93, and now total ETF assets under management (AUM) are fast approaching $1.5 trillion. Fund closures accelerated last year, fund launches have decelerated somewhat and yet the ETF juggernaut continues to gather steam. Paint some broad brush strokes for me to help me see the way you view this industry’s prospects.

Sapir: Well, I think the exchange-traded fund industry still has a long runway ahead of it. While ETFs have experienced tremendous growth, they only have 13 percent of the assets that mutual funds currently have. So I see tremendous opportunity for growth. You’re going to see growth in areas where you’ve seen growth previously. But we also see other areas where there will be growth, including in the alternative space. You mentioned 13 percent of ETF AUM relative to mutual funds. What’s the pie-in-the-sky scenario there in your judgment? Could there be a complete reversal one day? Is it going to be 50/50? Or is there a clear limitation to how much ETFs can expand? You hear a lot of pie-in-the-sky stuff, and then you hear more sober outlooks. Where do you fall on that spectrum of views about this particular trend?

Sapir: I’m very optimistic about the future of the ETF industry and the growth of the industry. We are likely to continue to see the level of assets come into ETFs. To a large extent, the growth of ETFs in my view has to do with a seismic shift in the way people view investing.

Back in 1993, when the ETF industry launched, most investing revolved around security selection.

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