The financial crisis ended up shining a light on what is so compelling about ETFs, Global X’s del Ama says.
Bruno del Ama picked a tricky time to start his new ETF business Global X Funds—right at the onset of the 2008 credit crisis. Now, five years after Lehman Brothers filed for bankruptcy and helped unleash the worst economic downturn since the Great Depression, Global X has grown to $2.3 billion in assets under management, and carved a niche in a still-quickly growing ETF market now boasting some $1.5 trillion in assets.
In an interview with IndexUniverse’s Cinthia Murphy, del Ama looks back at what the past five years has taught investors, and how, if nothing else, the 2008 downturn helped propel the use of ETFs.
IU.com: Banks today seem healthier and bigger than they were in 2008, and some of the legislation that was supposed to address risk following Lehman Brothers’ fall has yet to take effect. What do you think has changed? Are market risks any different today than they were five years ago?
Bruno del Ama: The big problem in 2008 was the issue of solvency with banks, and that created a whole downstream effect where the value of securities was challenged. Liquidity really dried up, and all of that brought into better context a lot of the benefits of ETFs: A lot of the issues that became important at the time—like liquidity and transparency—are precisely where I think ETFs are very strong.
Back in 2007, 2008, you had massive amounts of structured products such as capital-guaranteed notes being sold by private banks in Europe and in the U.S., and those things essentially went away right after the credit crisis, again highlighting the benefits of segregated vehicles like ETFs or mutual funds.
Everything went down, so performance became an issue across asset classes. Even hedge funds, which are supposed to provide hedges in those types of market environments, failed to do so, and it all went down pretty dramatically. In a way, it highlighted a lot of the risks investors face, as well as the benefits of ETFs and how they perform very strongly in those categories.
I think that was mirrored to some extent in our fund flows. We started our first product in February 2009, when we had only $11 million or so, and by September 2010, we had grown to $1.8 billion in assets.
So what's different? ETFs have become a very prevalent vehicle. From a fundamental economic perspective, the banks are much better capitalized; the regulatory environment with regard to capital requirements for banks—the absolute amount, and the types of capital that they can hold—is much higher. That set up a somewhat-more-sound financial system.
On the flip side, the “too big to fail” type of scenario worsened because a lot of the smaller financial institutions disappeared or were merged with some of the larger banks. Some larger banks that were in difficulty merged with even larger banks. So you actually have a much more concentrated financial services sector.
There’s some good and some bad. Clearly, the background economic environment is much stronger, and the banks’ capitalization is much better, but banks are much more concentrated, and I think investors are starting to forget some of the issues that they experienced with products like structured products back in 2007, 2008. We’re starting to see increasing significance or resurface of structured products certainly in Europe and now in the U.S. private banking world.
IU.com: Why start an ETF business right at the onset of the crisis?
Del Ama: We started working on the business in late 2007, early 2008, so you could already see some of the stresses happening in the financial markets. But, obviously, it wasn’t as bad as it was in October 2008. But from day one, we’ve been driven by the same core principles that drive us today, which are: focusing on our clients and innovation.
I think the only reason we’ve been successful is because we’re doing things that are different—because we’re no copycats. Also, because we’re focused on doing things that are not just different for the sake of being different, they’re useful to investors.
IU.com: It’s interesting that you would kick off your ETF business with an ETF focused on Colombia. Was it just a matter of opportunity, or some sort of expression on the emerging markets at the time?
Del Ama: Back at that time, talking about structured products, my partner in the business owned a broker-dealer that had a lot of clients investing in a structured product based off of one Colombian ADR. And it was just a horrible investment from his perspective. There was no diversity; it had credit-risk issues; it was expensive.
So he tried to understand what those clients were trying to achieve, and worked on finding a better way to achieve the same objective. His conclusion was that a low-cost ETF providing diversified access to the Colombian equity market would be ideal.
He reached out to ETF issuers, but they didn’t express an interest in developing this product, and that’s how he and I started talking. Colombia was the market that, in our opinion, suffered very dramatically from a perception gap because of the drug cartels, and that perception created a very attractive opportunity. In our opinion, assets were mispriced in Colombia. But the reality was just a market that was growing very, very rapidly and it’s actually one of the most vibrant markets in Latin America today.
Back in 2008, in an interview with Index Universe, I said the ETF market was not saturated. At the time, I said I thought we’re still very early on in this game, and it’s certainly playing out that way.
IU.com: Global X has gathered $2.3 billion in total assets since its first ETF in 2009. When you look back at the past five years as an ETF provider, what do you think has worked and what hasn’t?
Del Ama: What generally works is doing things that are innovative; meaning, not offering the second and third or seventh S&P 500 fund, but something that has value and that addresses clients’ needs. Those are our two key principles.
In that context, launching a fund like our super dividend ETF, which today is our largest ETF, was a good idea. It was in an environment where you have massive amounts of quantitative easing, very low interest rates and a very challenging environment, where most of the private capital is held by baby boomers, but they can’t generate from traditional fixed-income investments the types of returns that they need to retire.
Our super dividend ETF pays a yield of about 7.5 percent after fees and expenses, and comprises 100 securities, equal-weighted, allowing for a certain amount of diversity. Those are the types of things that provide value to clients, and the types of things that have worked.
As we evolve from an entity that was focused initially on very tactical plays or very specific exposures like the Colombia exposure, to things that can be a little bit more broad like the super dividend ETF, or solutions like the MLP space-focused MLPA (MLPA | N/A)—which was innovative in a cost sense, as it came with a much lower expense ratio than similar MLP ETFs—and MLPX (MLPX | N/A), our latest product in the MLP space that’s not only a low-cost alternative but also solves some of the tax complexities within the space.
That’s key, and obviously, we also brought out some niches products that we think are good, but that just didn’t end up attracting the amount of capital that we anticipated.
IU.com: How do you see the landscape for ETFs going forward?
Del Ama: If you look at assets, the ETF market is very much a passive-type market, and the big asset classes have been provided for. There will be some innovation that we will see, but I think it will be more on the margin. Products like the volatility strategies and BulletShares are some innovations we’ve seen, and we’ll continue to see things like that.
At this point, the question is, can alternative indexing opportunities or active opportunities really succeed on a meaningful basis? We’ve certainly seen recently that a lot of these alternative indexing strategies have done pretty well.
For example, I would categorize our GURU (GURU | C-48) ETF as essentially the only ETF we have that is specifically designed to generate alpha versus a core U.S. equity benchmark over the medium to long term. We’ve certainly been successful since inception in raising assets, and there are a number of other products that are doing well. We’ll continue to see some innovation there.
From the active perspective, I think it's still all about how good the manager is. We’ve seen that with a great asset manager like Pimco going into the market, they’ve been very successful at gathering assets. To the extent that you have other very good managers that embrace ETFs and make the jump into ETFs, that will also drive growth within the ETF marketplace.
Finally, more so than new products, I think what’s going to drive growth is just the penetration of the user base. I can’t tell you how many conversations we have with our clients who say they want an all-ETF version of portfolios currently comprised exclusively of active managers.
You have a lot of financial advisors that manage very large amounts of capital in practices fully comprising actively managed mutual funds or separately managed accounts, and clients are coming to them and saying they want an all-ETF solution or an all-passive solution.
From my perspective, the big growth in ETFs will continue, but it’s going to come less from product innovation on a relative basis, and more from a much higher penetration from a client-use basis.
IU.com: Is there any lesson from the crisis that you think ETF investors should not lose sight of as the economy recovers?
Del Ama: We learn from history, and history has taught us some of the things we should care about. Investors in 2008 cared about a number of things, such as the fact that they invested in a number of vehicles they couldn’t liquidate at the time. Because of that, liquidity has become a much bigger consideration for a lot of investors, and so has transparency—knowing what they’re holding—and counterparty credit risk.
Today investors are much more mindful of how they manage any counterparty credit risk exposures. In 2008, investors in general also lost a lot of capital, and performance became another big issue—one that has led to the way we construct portfolios today, whether from a diversification perspective or a more tactical perspective in terms of risk management. It’s important for investors to generally participate in the market but learn from these lessons that they need to have well-diversified portfolios.