Active ETFs will get their day in the sun, AdvisorShares’ Hamman says.
Noah Hamman, the chief executive officer of Bethesda, Md.-based AdvisorShares is a firm believer that active ETFs will one day soon start raking in assets. When he spoke recently with IndexUniverse.com Managing Editor Olivier Ludwig, Hamman said he’s looking forward to many of his firm’s active funds getting three-year ratings from Morningstar—a milestone that he says will give the ETFs crucial credibility.
But even without Morningstar’s benediction, his firm’s Cambria Global Tactical ETF (NYSEArca: GTAA) shows that maybe Hamman’s optimism is well-founded. The fund, a trend-following strategy and AdvisorShares’ most successful to date, has gathered almost $170 million since its launch in October of last year. Indeed, Hamman says active ETFs are raking in assets faster than index ETFs did in their infancy almost 20 years ago.
Ludwig: You are clearly staking a claim in the transparent active ETF space. What about nontransparent ETFs?
Hamman: I’m one of those ones in the camp that I don’t think are going to see nontransparent active anytime soon.
Ludwig: Forget about the “anytime soon” part. How about any time?
Hamman: I think it’s a real long shot. I’m surprised a firm like Eaton Vance stepped into that structure. That doesn’t mean they’re exclusively tied to it, of course. But, from conversations I’ve had with the SEC, I just can’t tell any sort of way, shape or form they could get comfortable with trusting that someone is going to put an accurate replication basket out there.
Ludwig: When you talk about Eaton Vance, you’re talking about the deal it did with Gary Gastineau, right?
Hamman: Yes, absolutely.
Ludwig: OK. Now, as it relates to your own funds, the old adage that “money talks and you-know-what walks,” it would appear that the Cambria Global Tactical ETF is head and shoulders above the rest of your products in terms of pure asset-gathering.
Hamman: Yes. It’s global asset allocation using a trend-following model. So it’s a good core strategy that’s going to react to downturns in the market. A trend-following model is never going to call it correctly. It’s not going to call the tops, and it’s not going to call the bottoms. But it’s going to adjust where trends exist.
Ludwig: What about the Mars Hill Global Relative Value ETF (NYSEArca: GRV)? Last summer—I think it was the July flows numbers—it just came screaming to the forefront. It gathered nearly $40 million, almost overnight. And now it’s sort of settled back to something like $15 million. That seemed a pretty interesting strategy. What would you say about that and the asset decrease that has occurred in the past nine months?
Hamman: Unfortunately, it’s been hampered by performance. A long/short strategy like that is incredibly hard to do. The story really took off as you kind of saw with the growth in assets. Advisors we spoke to were very receptive to it. And a lot of them made early commitments to it.
But the product has struggled. I think it hasn’t really done a great job in factoring in a lot of government intervention, not only in the U.S. but in other European countries where they had been short. So, performance has really struggled as a result of that. They’ve got a lot of work to do to build that track record back up.
Ludwig: So, you’re saying that the government intervention basically ruined their short positions because it was like the cavalry came to rescue the floundering stocks that GRV had shorted?
Hamman: Yes, very much so. It was probably the managers’ opinion that maybe those government programs wouldn’t work, plus—and I’ve seen a lot of managers caught up in this—no one really has a model that accounts for this kind of intervention, historically.
Ludwig: Can you speak a bit about the Peritus High Yield ETF (NYSEArca: HYLD)? That launched in November of last year, right?
Hamman: Yes. I believe it still continues to be tops in performance in the high-yield category. It’s a management team we’re really excited about. If there’s a product that fits really well in the active space, it’s something like HYLD. When you look at the number of securities that are in HYG and JNK, they just have all these little time bombs in there. HYLD’s strategy can be far more nimble. It’s 20 to 50 positions.
Ludwig: The percentage of active to passive ETF funds is less than 1 percent of the $1.1 trillion in assets. And, if you look at equity as a percentage of the whole, active equity ETF assets are more miniscule. What’s going on here?
Hamman: We’re so jaded in this world today that if you don’t have 500 million Facebook followers, your business is a failure. We put together a chart where we compared the first three years of asset-gathering for index ETFs compared to the first three years of active ETF growth. And it’s a stark difference—in those three years, active ETFs have far more assets and far more products than index products did. It took index ETFs 15 years to get the success that they did. When you look at a 15-year term for index ETFs, it looks very, very flat, and then it hockey-sticks up. I think we’ll see the same thing for active ETFs.
More importantly for us will be three-year track records and Morningstar ratings. As much as that maybe shouldn’t be the case, we know that will be the case—it’s going to drive its own level of interest in some of these products.
Ludwig: I’m guessing you’re an advocate of active management, but did you catch the Larry Swedroe Q&A we published, where he came out swinging saying active management was a waste of time. People came out of the woodwork after that and got really worked up about that.
Hamman: I read it and I saw all of the comments, which were great. I would describe myself in a couple of ways. I’m absolutely for someone being in the driver’s seat in an investment strategy. And whether that driver is in a packaged solution like our Cambria product, GTAA, or whether it’s Larry who’s asset-allocating with passive ETFs for his clients. No matter what he says—even if he quarterly rebalances and that’s all he does—he still makes a time-based active decision on when to change his clients’ investment strategy. And whether he likes it or not, he’s active, he’s the active manager.
So, I’m not against passive, and I’m not against buy-and-hold. In our approach, we feel like you have to have a little bit of both. And obviously, given some of the products we have, we think using underlying passive baskets is a great way to formulate an active strategy, whether you’re doing it in a packaged solution like we are, or whether you’re doing it directly through your clients like Larry is. We just always feel like there should be someone in the driver’s seat.
Ludwig: So you’re staking out some kind of middle ground, and broadening the definition of what constitutes active management when you talk about Larry Swedroe and his quarterly rebalancings?
Ludwig: You didn’t talk about your ADR fund, the WCM/BNY Mellon Focused Growth ADR ETF (NYSEArca: AADR). Can you speak to that a moment?
Hamman: That one, I’ll be honest with you, is the one I’m probably by far the most frustrated about, in terms of our ability to gather assets. This is an institutional money management team. They manage around $100 billion. They’ve been running this strategy institutionally for the last six years with about 10 percent out-performance annualized over the MSCI EAFE Index. I think in the life of the product alone they’re probably only ahead of the EAFE by about 2 percent, but net of fees.
And so this is one of those examples where I think we’ve got an unbelievable management team; we’ve got a strategy that’s transparent and we’re clearly adding alpha. And we’ve not been able to get people to move assets from those existing EAFE products into this product. And that’s been frustrating from a sales and marketing perspective, for us.
I know that long term, as that track record hopefully continues, as it is, it will be a huge product for us. It will be a nice core product, and will have a lot of assets in it. But it’s probably a good example because no one knows who WCN is. It’s a good example of a product that I think will take off once it hits that three-year track record.
Ludwig: Do you ever worry about price? Obviously, you’re not Vanguard Group or Schwab. But on that basis alone, as John Bogle loves to say, the only thing you can control in this big, bad world of investment management is cost. Is that something that is negotiable for AdvisorShares, or am I putting the cart in front of the horse here?
Hamman: No, not at all. In fact, hopefully we’ve demonstrated that to people already with the Cambria Global Tactical ETF. I think they started off with a 1.35 percent expense-cap limitation. And then right when we passed $100 million, we brought that down to a 0.99 basis point expense-cap limitation. Each underlying subadvisor feels differently about pricing, but in general, we absolutely are looking forward to having enough assets to be able to reduce fees across the board.
But I will say that doesn’t subscribe to that lowest-price philosophy. I think when you do that in the Bogle kind of way, it means you see absolutely no value in any active management at all. The attitude of, “there’s no way I can beat the index, so why even try?” just doesn’t work for a lot of people.
Ludwig: In fairness, Vanguard’s strategy comes out in the wash. It’s now the No. 3 U.S. ETF company in assets; but in terms of revenue, I think they drop to like sixth or seventh place. So, low prices have consequences for the top and bottom lines.
Hamman: To me they’ve won the low-cost game. You need size to compete with that. I saw those FocusShares ETFs. I’m very interested to see how that goes. Some of those funds have to have assets of $1 billion each to even get close to breakeven. It’ll be interesting to see if they can truly steal assets based on the pricing game alone.
Ludwig: In the end, you’re kind of the grand connector, right? You put people in the saddle and slap the AdvisorShares brand on their expertise, and hopefully you’re off to the races, sort of thing?
Hamman: Yeah, absolutely. And then our life is very much predicated on performance. We quite simply know performance has to be there for us to make the strategy. We could charge 2 basis points on our products. And if they don’t perform well in an active strategy, it’s not worth 2 basis points.