Why I Told Kevin O’Leary Of O’Shares 'I’m Out'

Nearly three years ago, TV’s “Shark Tank” celebrity, Kevin O’Leary, launched his own brand of ETFs known as O’Shares. Today the ETF family of six ETFs has just under $700 million in assets, with roughly 70% in its original ETF, the O'Shares FTSE U.S. Quality Dividend ETF (OUSA). I find the value proposition of O’Shares compelling:

“O’Shares Investments provides ETFs for long-term wealth management, with an emphasis on quality across our family of ETFs. O’Shares ETFs are designed for investors with objectives ranging from income and wealth preservation to growth and capital appreciation. Each of the O’Shares ETFs reflects our rules-based investment philosophy, including quality as an important characteristic. At O’Shares, we prefer the ETF form of investment fund for cost-effective, tax-efficient, and transparent access to investment portfolios. At O’Shares, we aim to serve investors by keeping investing simple, straightforward and easy to understand.”

Shortly after the launch, I briefly met Mr. O’Leary, who clearly believed in his funds. While I enjoyed the conversation immensely, I felt he was pitching me to invest (and write about the funds), much like entrepreneurs’ pitches to Mr. O’Leary and the other sharks on the TV show.

While I didn’t have the heart to actually say “I’m out,” I’m sure my body language was loud and clear. Here are the four reasons I decided at the time not to invest, as well as how the decision turned out.

Too Expensive

For a fund to get my money, the price must be right. All six ETFs have a 0.48% annual expense ratio. I compare the price tag of this U.S. stock fund to others such as the Schwab U.S. Broad Market ETF (SCHB) and the Vanguard Total Stock Market ETF (VTI), with annual expense ratios of 0.03% and 0.04%, respectively. I determined O’Leary was asking for too much of my equity.

Too Tax Inefficient

Taxes are fees too. OUSA has a dividend distribution yield of 2.53%, while VTI’s is 1.65%. Yet the total cash yield of a broad index fund is closer to 5% including stock buybacks. Getting the cash by building your own income fund is the far more tax-efficient strategy.

Too Narrow

I’ve long since believed that broader is better. OUSA owns 142 companies, while VTI owns 3,609. That means less risk without giving up expected return.

Nothing New Here

The “Shark Tank” sharks seem to invest in something that is unique and hasn’t been done before. To me, OUSA is just another large-cap value dividend ETF using a multifactor approach. Kevin Beadles, O’Shares director of corporate management and strategic development, did tell me there were far fewer multifactor funds when it was launched nearly three years ago. Admittedly, O’Shares has one big differentiator, Mr. Wonderful’s celebrity status. I don’t, however, see how that translates to extra money in the investor’s pocket.

Performance Report Card

How did my decision turn out? According to my calculations, since inception on July 14, 2015, OUSA’s total return including dividend reinvestment was 10.35% annually through June 12, 2018. While not bad, that lagged the Vanguard Total Stock Market Fund (VTI), which turned in a 12.06% annual return. The 1.71 percentage point shortfall was more than three times the additional expense ratio. So OUSA underperformed by more than fees, and was less tax efficient.

Admittedly, less than three years is far too short a time period for which to make any statistical conclusion. Also, dividend payers tend to be value, and it hasn’t been such a great period for value, and it may have bested its peers in this space.

And finally, O’Shares may do better in its newer smaller funds, including the just-launched O'Shares Global Internet Giants ETF (OGIG), though even that one strikes me as getting into a space after it has been hot, which often turns out poorly. Its top five holdings—Alibaba, Amazon, Facebook, Alphabet and Tencent—comprise more than 30% of the ETF’s value, with the top 10 accounting for more than 44%.

So while I think O’Shares is interesting, I’m sticking to my “I’m out” decision. I’ll keep my screening criteria of selecting funds with ultra-low costs, broad diversification and high tax efficiency. If someone considers this “dumb beta,” I can live with that.

And if I should ever meet Kevin O’Leary again, what do I think he will tell me? As in the show when an entrepreneur turns down his offer, he will probably look me in the eyes and say, “You’re dead to me!”

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.