Shiffer: More Fixed-Income ETFs Needed

February 26, 2014

Curian vice president discusses his firm's use of ETFs and what he'd like to see in the marketplace.’s Heather Bell sat down with Jonathan Shiffer, vice president and portfolio manager at Denver-based Curian Capital, to chat about how his firm uses ETFs and what he’d like to see in terms of new launches. What percentage of Curian’s assets is in ETFs?

Shiffer: The percentage of assets in ETFs really varies across the different strategies and portfolios. Across the organization, we manage about $18-19 billion, and ETFs make up a significant portion of that, maybe $5-6 billion across about 12 strategies. How long has Curian been using ETFs in its portfolios?

Shiffer: We started in 1993; we’ve been using ETFs since the inception of the firm. Are there any asset classes you see as neglected or overlooked by the ETF industry?

Shiffer: We are a large consumer of investment products such as ETFs. We’re working closely with the Street and we want to work with them to develop those ETFs or those spots we think are lacking within the marketplace.

Over the last 10 years, over the last five years, equity ETFs have really proliferated. We’ve sliced and diced that market to a finite level, but we haven’t seen that same fragmentation within the fixed-income markets, specifically as we’re going through this transition period, or potential transition period.

We want to be able to express our views in a much more precise manner, instead of these broad slices. We’re really working with a lot of the Street to identify those slices of the fixed-income market in which we want to be proactive.

We also want to be able to take slices in more esoteric strategies—futures, more specific commodities exposures—with the liquidity.

We can obviously execute trades and transactions through various vehicles, but with a long-only ETF, we really want to make sure we have that exposure across the global economy, which is becoming much more synchronized. Are you hoping for more international fixed-income ETFs primarily?
More international fixed income, more international equity, more currency plays as well. A lot of the ETFs are regional or country-specific, but we take a significant amount of implicit currency risk. We want to be able to, one-for-one, either isolate or insulate that currency risk, or take a specific currency trade. With the fragmentation, we see inflationary outlooks across the globe. Have the existing currency-hedged ETFs been helpful to you?
Helpful, but not enough. Is there a country or region in particular that you’re hoping to see?
Pick one—there’s just not enough. Are there any ETFs currently trading that you’re keeping an eye on as particularly innovative or useful?

Shiffer: That’s a tough question to answer because the market is so very active, and it’s generally an expression of our views. Something that might have come under the radar to the Street may be something very exciting to us or to myself; conversely, something that was brought out with banners, bells and advertising might have no interest to me.

The marketplace is very dynamic right now. One of the considerations is assets under management. You see new products coming to market and being seeded with small dollar amounts, and we have to play the waiting game. We’re biting our fingernails waiting for new products to hit the market and have capacity or at least have proof in the marketplace that it’s a viable product.


Shiffer (cont'd.): The opposite of that is the death watch, looking at some of these ETFs that come to market. As a consumer of that ETF product, we want to find a happy balance that indicates that ETF will be there for the long term, because our exposure changes.

We want to be able to put it on the shelf and take it off the shelf as many times as we want, not just take it off when the market’s going in that direction and then have it disappear for the next time it comes back around, because the markets tend to be very cyclical. So basically, you’re looking for a proven track record?

Shiffer: A proven track record, a commitment to the product, an acceptance in the marketplace, a very liquid secondary and tertiary marketplace so that we can continue to have that exposure at size, without having to worry about float. What do you consider to be an acceptable amount of assets or liquidity?

Shiffer: It’s really specific. It changes a little bit with regard to whatever the asset class may be and the type of exposure. Certainly, anything in the domestic equities space, we’re going to want to see a significant amount of assets with maybe a year of trading in it so you can see the action of the marketplace.

In a small commodities piece, that’s not necessarily needed—we’re not going to put the same size of allocation behind these trades. It just needs to be proportional to what you want to enact, and you want to make sure you’re having an efficient cost of execution or participation. Are there asset classes for which you think ETFs are inappropriate—like certain areas of the commodities space or types of alternative investments?

Shiffer: I certainly think the alternatives market is very underserved because of the cost of execution or the cost to roll out a strategy within an ETF. Frankly, I don’t know that there is necessarily a “wrong spot” for an ETF.

It’s a very efficient vehicle; it’s really nothing more than a wrapper for a lot of intents and purposes. If you could execute or offer that same kind of strategy or that same exposure through that wrapper, there’s really no reason I don’t think you should. Do you think that actively managed ETFs are likely to gain traction?

Shiffer: I think that’s a very different marketplace. I don’t want to make a prediction as to whether they will or won’t, but it’s certainly a very specific marketplace and the two types of investors that would invest in one or the other are often very different.

There are tremendous assets in the ’40 Act space, and they continue to garner assets across the board—there’s no reason to say that something in an active ETF won’t be able to garner those same kinds of assets over the long run. Is Curian looking primarily at the index-based ETF space?

Shiffer: We’re really equal opportunity—we just look at ETFs across the board. We really want to make sure it’s a pure expression of our desire to have that exposure. It becomes a secondary or tertiary consideration as to whether we’re looking at an active or beta or other version of an ETF other than index.



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