‘Shark Tanker’ O’Leary Jumps In ETF Pool

Founder of new ETF issuer O’Shares learned fund construction from his mother.

Reviewed by: Drew Voros
Edited by: Drew Voros

Kevin O’Leary is best known as one of the hosts of “Shark Tank”—aka “Mr. Wonderful”—but beyond deciding what new entrepreneur to fund, he is a wealth manager for himself and his family first. His decision to start O’Shares Investments is founded in those family roots. The construction idea behind the firm’s recently launched ETF, O'Shares FTSE U.S. Quality Dividend (OUSA), as well as four other funds in registration, comes from the way O’Leary’s mother managed her money. O’Leary will be a featured speaker at Inside ETFs in January.

ETF.com: What brought you to start O’Shares and build your own ETFs?

Kevin O’Leary: I've been lucky as an entrepreneur. And I've amassed a certain amount of wealth. And I have to decide what to do with it, so I created a trust in 1997. It’s a very simple mandate. It takes care of kids from birth to last day of education, the entire extended family, and plus a whole bunch of charities that we’ve committed to for multiyear periods.

I'm going to do to for my kids what my mother did to me. She basically said, “I'm going to pay for you from the date of birth to the last day of education. And then I'm cutting you off. And good luck to you." And that’s it. I didn’t believe her. I should have. But it worked out.

The trust is designed to skip the generation. In other words, after they graduate, their children will get the same deal. I’ll guarantee to take care of them from the day they're born until the last day of education, and their kids. So it’s a structure that has to pay out 5 percent a year in perpetuity. That’s my challenge.

The trust structure is 50 percent equities and 50 percent fixed income, always. I've used all kinds of managers over the years, all kinds of asset classes, you name it. And the trouble I want to avoid going forward is style drift, particularly on the equities. What I decided to do recently was to use an ETF tool kit to do all of the equities; not the fixed income yet, just the equities.

ETF.com: What does that tool kit look like?

O’Leary: Here was the process: I've got a bunch of analysts that work for me. And I said, “Go look at all 1,700-plus ETFs and find me the ones that only pay dividends.” I have a personal philosophy. I will never buy a stock that doesn’t pay a dividend. That’s a lesson my mother gave me. She would never buy a security that didn’t pay interest or dividends, ever. I saw her own personal portfolio after 50 years of that strategy and the performance was unbelievable. She used corporate credits and large-cap dividend-paying stocks. She beat every index.

So I looked back at the data on the equities side. Over the last four years, 71 percent of returns came from dividends, not capital appreciation. I do not want to own any stocks that don’t pay dividends. We ended up with about 50 different ETFs that have been very successful. These are large ETFs.

But here’s the problem with these first-generation ETFs. They were market-cap-weighted indexes. After time, 10 or 12 names became 50-60 percent of the ETF. I don’t want that.

I was concerned about concentration—not enough diversification. So I asked my research team, “Can we talk to somebody and create an index that solves this problem for me? I don’t want to own any more than 5 percent of anything. I want complete sectoral diversification. And I want geographic diversification. I just want the good names. I want some quality metrics put in.”

And that was the beginning of OUSA, and it will be the same with [future funds] OEUR [the O’Shares FTSE Europe Quality Dividend ETF] and OASI [the O’Shares FTSE Asia Pacific Quality Dividend ETF]. We’re working with FTSE-Russell on this.

The reason O’Shares exists and OUSA is trading now is that it solves a problem for my family trust. I'm not telling people to buy it. I'm telling you I'm buying it. And if you can find me a better ETF, I’ll buy that too. But so far, I can't find it. So I'm building my own. That’s the story here.

ETF.com: You mentioned fixed income, any products being planned for that?

O’Leary: Yes, because fixed income is 50 percent of my trust. As a fixed-income investor, I care a lot about what the Fed does, because there are two things I can control as a fixed-income guy. I can control duration and I can control credit quality. Do I buy government bonds, which is debt, or do I buy corporate credits?

I want a strategy in fixed income to deal with both of those. When I look at the kinds of ETF products that I want to use to solve that strategy, one would be a floating-rate loan ETF. That’s definitely on my radar screen. And I'm working on that now. Secondly, I want to look at corporate credits that have a quality measure to them. I don’t want to own high-yield debt with no covenants.

I can't find the product I want there, so I'm going to have to build it. Just owning a high-yield debt because it’s called “high-yield debt” doesn’t meet my quality test.

Finally, there are government bonds. And in my view, it’s not time to be in those yet. If we go back over the last 17-20 years, we’ve had nothing except rate declines. If we normalize back to, let’s say, 3-4 percent, you’ll lose 20 percent of the value of a 10-year Treasury bond, which I don’t want to do. So I’ll bring to the market what solves my fixed-income problem.

I'm extremely conservative on the fixed-income side. Right now, I'm getting about 4.7 percent with my strategies, and my duration is under five years. We’ll probably bring products that resemble what I have discussed.

ETF.com: Do you see yourself as a wealth-manager or ETF issuer? Or is there a larger role you envision for O’Shares, such as ETF strategist or something else?

O’Leary: The reason I do “Shark Tank” is that I am a huge advocate of this philosophy. If you’ve had success as an entrepreneur, you owe the next generation a road map on how to get there. I spend 60 percent of my time today teaching undergrads and graduate students in MIT and Notre Dame. I want those graduating students to start businesses. I'm a passionate advocate for that.

I also believe we don’t educate our children enough about financial literacy. And so my roleand what I hope to do in using the platform that I've created across all media—is that I would like to explain to people what to do in terms of how to invest. I'm not telling them what to buy. I'm just sharing with them what I'm doing. I eat my own cooking. I'm trying to solve a problem for myself and my family as an investor.

What I ask others to do is to look at what I'm doing and compare against what's out there. That’s all. If you can find better, please let me know, and I’ll buy that. Because I'm doing this to really protect my capital. I’ve got to make 5 percent a year, minimum.


Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.