Virtus ETFs Farm Nontraditional Income

ETF issuer sees opportunities beyond traditional Treasuries and bonds.

Reviewed by: Drew Voros
Edited by: Drew Voros

Bruce Bond

Virtus ETF Solutions, an affiliate of Virtus Investment Partners with more than $100 billion in assets under management, issues ETFs with actively managed and index-based portfolio solutions across multiple asset classes. The firm has 12 ETFs, with $580 million in assets, its biggest being the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) with $130 million, and the Virtus Real Asset Income ETF (VRAI), which seeks to offer investors nontraditional income vehicles as an alternative to Treasuries and bonds.

William Smalley is head of product at Virtus ETF Solutions, where he leads ETF product management and strategy for the firm. He  discussed with us how Virtus fits into the ETF landscape. Tell me the Virtus ETFs story.
William Smalley: My partners and I founded what was ETF Issuer Solutions, and in 2015, Virtus acquired ETF Issuer Solutions. We wanted to be a manager of managers.

Given the obvious scale in this business today, it made sense for us as a startup company to partner with an established firm like Virtus Investment Partners, which is a publicly traded multiboutique investment management firm, with more than $100 billion under management. Virtus was the investment management arm of Phoenix Insurance Co. from the 1990s.

Virtus is a manager of managers, which is part of why, when we were ETF Issuer Solutions, we found Virtus a really compelling home for what we were looking to do on the ETF side—to be a multimanager ETF complex with a nod toward active management. What does “manager of managers” mean?
Smalley: We are the advisor to investment companies. In this case, ’40 Act funds and ETFs. We look to partner with investment managers who run the portfolios. And we effectively do everything else.

Virtus owns various investment management firms that are a part of the family, some of whom subadvise ETFs for us. We generally look to partner with specialty boutique investment managers, either in actively managed form, in the subadvisory role, or if we’re going the index-based route, with a specialty index provider, so we could deliver very targeted product.

Virtus is the investment advisor to all of our funds, including our ETFs. In some cases, that means we manage the portfolio on the ETF side. Most of the time, we tap subadvisors to manage the strategies we’re seeking to distribute to financial intermediaries. Tell me a little bit about the differentiations. For instance, you have Newfleet, which subadvises two of your ETFs, the Virtus Newfleet Multi-Sector Bond ETF (NFLT) and the Virtus Newfleet Dynamic Credit ETF (BLHY).
Smalley: That’s a great example of one of our affiliated managers. Newfleet is a fixed income shop. Their specialty is multisector bond investing, which is a pretty well-known capability on the mutual fund side. We have introduced a couple of ETFs that highlight some of Newfleet’s capabilities, NFLT, which is a multisector unconstrained bond strategy across 14 different fixed income sectors. Newfleet takes a team-managed approach to managing fixed income portfolios.

We like to talk about Newfleet and the multisector approach as the new core bond approach. That’s going beyond Treasuries and traditional bond assets, with a little more of an emphasis on securitized credit and bank loans, and some more esoteric fixed income sectors. You also have both active and index-based ETFs?
Smalley: We have a pretty even split. On the ETF side of the house, we do both actively managed and index-based funds. Virtus’ roots are in active management, especially with some of our signature affiliated managers like Newfleet. Where we can, we want to highlight the strengths of those managers, which is really, at the end of the day, the strengths of Virtus. How do you differentiate yourself from other issuers?
Smalley: No issuer out there has a focus on nontraditional income like we do. There are several areas, several asset classes where we are the only game in town, based on an ETF wrapper. When you're working with Virtus, what you're getting is best in class, best in breed, and peak investment management talent. And if that’s index-based or actively managed in the context of ETFs, it doesn’t matter to us. What you're getting is something unique, and oftentimes alpha-seeking.

We’re a little different than all of the ETF companies, certainly some of the largest companies that are very beta-oriented. Our goal is to be consultative to financial intermediaries in the field. And when an advisor’s practice dictates that an ETF will be an appropriate vehicle, we’ll have that tool. What does your distribution model look like?

Smalley: I would say our distribution approach is identical to that of other midsized and large asset managers commensurate with a $100 billion shop, or more. Our distribution strategy centers on financial advisors. And, of course, they ultimately have clientele. But we don’t do a lot of direct-to-consumer marketing sales. It’s more intermediary-based. What's the rationale when somebody comes to you for alternative income products?
Smalley: At the 10,000 foot level, we are in a very low interest rate environment. We have been for some time. How should particular investors be thinking of portfolio construction? Six months ago, we were saying, “Hey, the 10-year Treasury yield just moved below 2%, which is historic lows.” The 60/40 portfolio is not yielding nearly what we have come to expect. You must broaden the opportunity set.

Investors are being forced into thinking more about alternative income strategies. A lot of what we’re doing is working with investors on different income assets, things like preferred stocks, for example. They offer a higher yield profile with relatively lower risk equities. Those are the sorts of things that we encounter sometimes as this interest rate environment continues to worsen—the potential universe of users of these types of products has only grown. Let’s talk about one of your newest ETFs, the Virtus Real Asset Income ETF (VRAI), which has attracted more than $112 million in assets since launching 18 months ago.
Smalley: When we’re assessing new products, we’re looking at areas where we think we could add value relative to the ETFs that are now available. There are a few real-asset-oriented ETFs, but there are none—other than VRAI—with a specific focus on income, which means we’re not investing in things like gold.

VRAI, from an investment and growth standpoint, has an income methodology, low cost and a tax efficient package relative to mutual funds. This is an example of where we can offer the ETF in a sensible package for investors who may want to outsource the decision on how to allocate among REITs and energy infrastructure, for example, while giving you a little bit of inflation protection. This particular product has an explicit income tilt in both its selection criteria and weighting scheme.

We will select the implementation style based on the strategies. If we think that we have an active capability edge for a manager, we’ll look to highlight that. And if not, but we still see an interesting market opportunity for a strategized offering, we’ll do it in index-based form.

Again, I don’t want to say we’re agnostic necessarily, because we want to highlight the strengths of the management talent. But it’s a mix of both index-based and actively managed in our lineup, which, as you see today, is reflective in our lineup.

Contact Drew Voros at [email protected]



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 and ETF Report.