ETF Lifetime Achievement: Jonathan Steinberg

Jonathan Steinberg may seem too young to be the recipient of a lifetime achievement award, but as founder, CEO and president of WisdomTree, he has played a critical role in driving innovation in the ETF space. His footprint is nothing short of impressive.

WisdomTree is known for breaking new ground, over and over again. The firm has pushed the envelope well beyond the confines of market-cap-based investing, introducing strategies that are dividend-focused, currency-hedged and all around innovative. And as Steinberg tells us, this is all just the beginning.

ETF.com: Were you surprised when you got the call telling you that you had won this year’s Lifetime Achievement Award?

Jonathan Steinberg: Yes; I was surprised, because “lifetime” achievement sort of makes it sound like the end. But to me, it feels like it's just the end of the beginning—we’re in the thick of it. Hopefully it's not the end for me. I hope this is not foreshadowing.

ETF.com: Tell me a little bit about the early days. You founded WisdomTree, but initially it wasn't an ETF issuer, right?

Steinberg: That’s right. The company that is WisdomTree emerged out of something called Individual Investor Group, which was a financial media company that I started in 1988. My goal was to be a sort of McGraw-Hill/Value Line to bring independent, unbiased research to the masses. I was the founder and CEO as well as the editor-in-chief of Individual Investor magazine.

I found ETFs first editorially. We wrote about the “Q’s” in 1999, and the light bulb went off. As I dug into the structure, the wrapper that is the ETF—fully transparent, intraday liquidity, great tax efficiency—I felt clearly that this would be the future of asset management. And back in 1999, there was certainly less than $100 billion invested in ETFs; maybe as little as $50 billion. So, I saw something early, and pretty much devoted myself to it ever since.

ETF.com: That’s an interesting leap: from research to money management. And you've done it with the same original team who’s still with you today.

Steinberg: Absolutely. There was a theme, though, of helping investors from the very, very beginning. We put the investor first, and that was sort of the arch. When we got into ETFs as a media company, we started working on indexes. I thought maybe I might just be a licensor of indexes to the industry. My first index I licensed to Bruce Bond, the founder of PowerShares. That was the first equity index that they launched. So, I started as an index creator.

Eventually, I connected with the Bank of New York, and I saw that I might be able to do more than just be the index provider. Instead of just being the S&P, I could be iShares or Vanguard, and I wanted to, because I could control the experience more, control how the investor would interact with us.

ETF.com: WisdomTree is one of the progenitors of what’s known today as “smart beta” as a true alternative to market-cap weighting. What drove you down that path?

Steinberg: I would say that WisdomTree was among the first of the second wave of ETF player. The traditional player was State Street, iShares and Vanguard, licensing third-party cap-weighted indexes. To us as a business, it was a question of, how do you live in a Vanguard world? Even though Vanguard had not launched their first ETF in 1999, I knew that they would be coming. I wanted to participate in this new technology, but I needed to create a business.

I thought nonexclusive indexing would lead to incredible pricing pressure, commoditization … which we've seen. And the whole business model was how to be a self-indexer, how to combat the dynamic of ever-lower fees on nonexclusive indexes.

Our first execution of self-indexing was smart beta, which could have been called fundamental weighting, or rules-based active. But we wanted to create a better set of rules to beat the market or to achieve different outcomes in different market cycles. And that's what we did.

ETF.com: Has anything in the firm's growth, and the ETF market’s growth, surprised you over the years?

Steinberg: WisdomTree launched or first funds in June 2006. It's been about 9 1/2 years. The industry's had about $1.6 trillion in inflows since 2006. I would have thought in absolute numbers the numbers would be higher.

But where I was pleasantly surprised on the positive was the market share of inflows that the ETF industry took relative to mutual funds, which was much higher.

I didn't see that in advance of the financial crisis. Flows for the industry shrunk for a few years, and really didn't rebound until 2012. But during the 9 ½ years, ETFs have taken 60% of the inflows going into equity funds [including long-term mutual funds]. And that is a big number. I'm a little pleasantly surprised how big that number is. We've really seemed to have taken over the asset management industry. I don't know a gentle way to say it, but the financial intermediary and the end investor seem to be gravitating in ever-increasing numbers to the ETF structure on merit. And that's very exciting for all of us.

ETF.com: What do you see as your biggest accomplishment in this industry?

Steinberg: I am most proud of the organization we’ve built. First, we pioneered a new business model, which is self-indexing.

Secondly, the whole time we've been public, so we've had to do this in a very public, visible way. Everybody got a chance to judge us. But we've had, by far, the best-performing stock of any of the publicly traded asset managers. Last year, we also achieved the highest margins of any of the publicly traded asset managers. Our accomplishments have not just been that we created an interesting new fund, but that it's actually translated into a great business.

The last piece, which I really take so much pride in, is the team that we've developed. We're certainly not the biggest, but we might actually have the most senior team in the industry—the team with the longest longevity in ETFs. It's the completeness of it all, and I'm very proud of that.

ETF.com: Is there anyone in this industry that you look up to, who has influenced you the most?

Steinberg: Let me say that I love the ETF industry. I mean I really love it. And the quality of our competitors—these are the most competitive asset managers in the world. But I would say that the person who I have to give the most credit to is [former hedge fund manager] Michael Steinhardt. He was really an outsider to the industry. When we were making that transition from media company to asset manager, I needed a lead investor to help us execute the business plan. And Michael was the only person who wanted to do this, who backed the business plan and the team. I give him a tremendous amount of credit for having vision. I'll throw him that accolade.

ETF.com: Any tough lessons along the way? Anything you wish you had done differently throughout your time in ETFs?

Steinberg: I really wish I could have started a couple of years earlier. I tried to get into the industry as fast as I could, and make that transition from media to asset management. But it was a couple of years. If I could have done it in 2003 or 2004, when there was significantly less competition, it would have really been to our advantage. But I really can't complain. We're very fortunate.

ETF.com: When you look forward, where do you see some of the biggest opportunities for the ETF industry?

Steinberg: We have this incredible structure for WisdomTree and for the industry. We've been very innovative. We put a tremendous amount of intellectual property into the structure, and into all these innovative exposures that we've created. And on structure and the innovation, we have taken incredible market share.

But we are at the cusp of new legislation. I think this fiduciary rule out of the Department of Labor will be the next catalyst of growth in assets. We're seeing a regulatory push all around the world to have the advisor work with their customers in a fee-based manner, not commissions. ETFs benefit greatly when they're in a fee-based relationship. We're about to see extraordinary growth in the U.S. and worldwide for ETFs.