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Talk to Joe

I wanted to get out. More than anything, I wanted to get out.

It’s not that I had it bad. I had it pretty good, if I’m being honest. Better than I deserved. But still, I wanted to get out. The dust was settling on the global financial crisis and I was working for the wrong company, living in the wrong city, married to the wrong spouse, and I wanted to get out.

I was complaining about my situation over a few too many drinks one night. I used to complain a lot. Complaining is what I did back when life happened to me instead of the reverse. I didn’t understand that yet, so I was complaining to my friend Tim Meyer who smiled and said “Joe got out. Talk to Joe.”

Talk to Joe.

We used to wear suits. Especially in finance, we used to wear suits to meetings. So when Tim’s intro led to a lunch meeting with Joe Barrato I wore my best suit. Joe showed up in jeans and a backwards baseball hat.

Joe was a legend at Rydex Investments. He had built a bunch of massively successful funds for the company before he got out and launched Arrow Funds in 2006. And he sat there with me that day, talking in his direct no-time-for-bullshit way, explaining to me how he got out and what he was building at Arrow. We talked funds, we talked factor investing, we talked baseball, and we talked about life.

It took another decade, but I did get out. I was an asset management CEO. The whole thing was preposterous, CEOs are tall guys with great hair and Ivy league degrees, but there I was. And I was struggling. We did build the fastest growing sub-advisor in the ETF industry, but that wasn’t enough to carry us over the line of profitability. Not in the age of single-digit expense ratios.

What I needed was for the world to see what I saw in our reverse-cap strategy, but it was in the wrong part of the cycle. I tried to explain mean reversion, index concentration risk and the equal-weight premium but investors wanted to pile on the hot trends, valuations-be-damned.

The largest financial advisor platforms banned access to the fund, as they did to most small independent fund issuers – not for reasons of investment merit or client suitability but based on revenue sharing agreements with our larger competitors. And then when Blackrock and MSCI copied my idea after multiple “information gathering” calls with me, those same advisor platforms immediately granted access for their funds. This is the business I’ve chosen.

At this point everyone in my life urged me to close the fund. The steady drumbeat of passive index flows were pushing FAANGs to ever inflated valuations, and that meant reverse-cap was under-performing. No one could understand why I would stick with a failed idea.

But it wasn’t a failed idea. And reverse cap wasn’t just a fund. It was a middle finger at the market cap weighted index funds. It was an anti-monopoly statement. It mocked mega cap valuations, and big tech centralization. It was entirely contrarian. And it was built to stand the test of time.

When we sold Exponential ETFs I couldn’t get anyone to put a fair valuation on this one part of the company, so I managed to walk away with reverse-cap myself. I owned the fund, but I no longer had a fund company to support it. And supporting it would hurt.

I liquidated everything I had. I sold my boat, but that boat was a money pit, right? Then I sold my car, but that car was too fancy and conspicuous for me anyway. Then I spent the money I had set aside for camp for the kids. Then I had to borrow money. Just when performance was separating itself I was nearing the end, and I knew it.

“Hey Phil, it’s Joe. Check out the research report I just put out. It’s all about equal weight and reverse cap weighting. You’ll like it.”

Of course. Talk to Joe.

That reverse-cap fund is now the Arrow Reverse Cap 500 ETF. The ticker is now $YPS. The index has beaten the S&P 500 by approximately 30% over the past six months. And if you want to know more about the fund, talk to Joe.

Long Term People

One of my professional mentors and heroes beat cancer this year. After months of uncertainty, painful treatments and indescribable fear, he emerged with a clean bill of health. When he called me with the news he told me that the experience has transformed his outlook on life.

“It’s funny, but all those risks I was afraid to take, I look back and can’t figure out what I was ever afraid of. And all those work goals I cared so much about, I just can’t bring myself to care anymore. It’s not that I don’t want to accomplish those goals, it’s that the goals for the sake of the goals, or for the sake of my company, it doesn’t mean anything to me anymore. The only thing that matters is the people I want to work with, to celebrate with and to accomplish great things with. It’s all about the people.”

Long term games with long term people.

That’s a Naval Ravikant saying. Naval is a modern-day philosopher, and venture capitalist. In that order. Here is his the full quote:

“Play long-term games with long-term people. All returns in life, whether in wealth, relationships, or knowledge, come from compound interest.”

Michael Venuto is another long-term person, and Michael Venuto is playing a long-term game.

I knew from the first substantive conversation I had with Mike that we would become friends. Mike had been writing about the concept of investing by Ethos, and I had been following it from afar. I loved the concept. An investment ethos can be built around climate change or social justice, but it can also be built around value investing, passive indexing, or thematic tech trends, or anything else. What investing by ethos means is that your investment strategy is true to who you are.

I had just launched a fund based on the concept that any company in any industry is in the business of satisfying their customers, and customer satisfaction is the most critical long term metric for company growth. Simple concept, complex data, and it hit the ethos concept on the bulls-eye.

Mike was surprised I knew about his “ethos” thesis, and it led to an hours-long discussion over several-too-many drinks about product development, and factor investing. I shared my Pareto Index idea, and Mike poked enough holes to kill it. Mike shared his Power Law index idea, and I returned the favor. I shared my inverse-market-cap weighting idea. Mike shared his ETF industry index idea. A friendship was formed. And it would take years for that friendship to transform into a business partnership.

Mike’s company Toroso Investments is starting to look like what people like to refer to as an overnight success. If you follow the asset management industry and haven’t heard of Toroso, you soon will. Toroso has had a key role in just about every breakout ETF to hit the market over the last several years. And like every other “overnight” success story, this one too was precipitated by almost a decade of grinding, restructuring, refining, and refusing to accept any other outcome.

To state the obvious, Mike didn’t grow Toroso on his own. Guillermo Trias is the CEO, and you aren’t going to find a more optimistic and visionary CEO in the industry. Dan Carlson is the COO/CFO and is the glue that bind’s a network of the team’s projects together. Eric Falkeis, David Dziekanski, Dan Weiskopf, and newest addition Michael Gayed are each carving out their own businesses under Toroso, and their own niche in the asset management space.

Long term people.

Do you want to know what Toroso’s secret to success is? It’s really not that complicated. They help anyone and everyone who asks for their help. Thinking about launching a fund? Want to grow that fund? Want to access the best portfolios or the best strategies? Call Toroso and you’ll get honest feedback, a roadmap, and help in any way they can. After doing that for a decade the results have compounded into an “overnight” success.

Long term games.

Toroso was one of our earliest supporters at Exponential ETFs. We had built portfolio management and capital markets systems for scale, and it became clear that scale would have to come from the outside. Toroso was building and growing ETFs left and right, and needed a portfolio management team that could handle complex strategies while managing portfolio taxes and custom baskets and market makers and reporting and everything else that goes into managing an ETF.

Toroso trusted me to manage the underlying trading for their most prized ETFs. And inside Exponential, I trusted Charles Ragauss to do the same.

Charles had been working with me since before we were called Exponential. Before we were called ACSI Funds. Before we were called CSat Investments, and before we were called SFC Strategies. We would end up launching two proprietary ETFs, and managing 14 others while building an ETF sub-advisor business that grew from $50 million in assets under management to 1.8 Billion in less than two years.

We built that business on a limited budget with the ruthless efficiency that only an underdog can bring. We had a determination to prove ourselves to the industry, to each other, and to ourselves. As Josh Wolfe says: “chips on shoulders put chips in pockets”.

Necessity is the mother of invention, and we grew our business by taking risk, by doing things we’ve never done before, and by paying attention to the details.

Charles is another long term person playing long term games.

And now, today, I get to announce that Toroso Investments has acquired Exponential ETFs’ sub-advisor business.

“True long-term thinking is… not about any single accomplishment. It is about the cycle of endless refinement and continuous improvement. Ultimately, it is your commitment to the process that will determine your progress.” – James Clear

I attributed that quote to Toroso earlier this year, and it also applies to Charles Ragauss, Qiao Duan and Eric Kelly who will now be joining them. It is a partnership of like-minded, entrepreneurial-minded, long term people. And I could not be prouder for what we built, and for the future of Toroso.

As for me, I still have unfinished business. I have learned a few things as an entrepreneur. I’ve got scars – the kind that can only be earned on the field of battle. I am stronger, tougher, and a whole lot less naïve than when we first launched.

Here is some of what I have learned: startups are harder than you expect, they take more time than you expect, and they require more funding than you expect. And these days, it also takes better technology than you expect. Which is a long way of saying, this entrepreneurship thing, I can’t do it alone.

I will soon be making an announcement on the future of the Reverse Cap ETF, and shortly afterwards I’ll be announcing the company that I’ll be joining. A Fintech company right here in Detroit. An underdog company with a lot to prove. A company led by people with chips on their shoulders. A company full of long term people.

Playing long term games.

Beyond the Trough

Detroit is a tough town. The weather is tough, the people are tough, the sky is grey for eight months out of each year. I didn’t grow up in Detroit so there are things I notice as an outsider. Like the fact that everyone starts work early in Detroit. They start the day early, they quit the day late, and in between they work hard.

The morning in Detroit has a certain toughness. Tough people with thick old gloves and boots carrying thermoses and lunch pails to their jobs. White-collar workers walking with a touch of shame; blue collar workers with a touch of pride. That, more than anything, is a Detroit thing.

Charles Ragauss grew up in Grand Rapids, and furthest from Michigan he ever got was a brief stint in Columbus, Ohio. When our office was based in Ann Arbor it never felt right to Charles, who moved to downtown Detroit even though it meant a long commute. Charles feels more at home in Detroit among people who work each day until they can’t anymore, and then drink a Manhattan when they get home, thinking about how to do it all over again the next day.

Josh Blechman grew up just outside of Detroit. It is ironic, because Josh is now managing our NYC presence, the only member of Exponential who is no longer based in Detroit. Josh carries a West Bloomfield pleasantness on the outside which masks his Detroit toughness below. Josh doesn’t carry a worn old lunch pail to work but he does carry the work ethic that accompanies it.

Eric Kelly grew up a few miles outside Detroit. He comes to office early every single day, ready to grind and ready to work. He never complains, he never has an off day, he never brings up the fact that he has taken on three times the amount of work as he signed up for.

Christina Stage too, is from the Detroit suburbs. Christina has so many jobs I couldn’t even keep track if I tried. Christina manages human resources, billing, marketing and special projects for Exponential – and does the same for our sister companies The ACSI and Detroit Vineyards. There is no amount of work that is too much for Christina to handle.

Qiao Duan, however, did not grow up in Detroit. Qiao grew up in Xinjiang, a province on the Western edge of China. A province that is decades behind the Chinese metropolises in terms of development. It is a cold province, it is under conflict, and it is tough. After Qiao got recruited to come to America to enroll in the University of Michigan’s Quantitative Finance and Risk Management graduate program, her fellow students all sought jobs in NYC and Chicago. But for Qiao, Detroit felt closer to home.

This is the team I get to work with at Exponential ETFs. My team is Detroit Tough.

Here is a graphic that Paul Graham put out, a graphic that illustrates the life of a startup:

Trough of Sorrow. If anything, that is understated. It is hard to describe that transition from initial enthusiasm to the Trough of Sorrow. When you start, sure, you plan for contingencies, you model out the “bear case” you think you’ll be prepared when it gets hard. But really, that is the head talking, not the heart. Startups are launched with the eyes on the upside. Startups are launched with founders imagining the glory, the wealth, the fun and the freedom. But it is hard. Harder than founders expect, and many aren’t as prepared as they thought. And sure enough, just about every startup lands in the Trough of Sorrow.

Competing in a saturated market is not for the timid. Sleep becomes a luxury, something you hope will come a few nights each week. And the obstacles take a psychological and physical toll.

It took a toll for me. It took a toll when the Cincinnati gatekeeper condescendingly chastised me for telling him the benefits of a fund I had launched just the week prior. Even systematic strategies need a three year track record for him to have the ability to evaluate them, he smugly instructed, and how dare I waste his time with a brand new fund.

It took a toll when a promising new hire practiced for days in preparation of a client meeting with a Chicago-based financial advisor. The advisor never showed up. Three weeks later that new hire left the industry.

It took a toll when an ETF strategist told me that they love one of our funds but that they “don’t invest with startups” even as they describe themselves on their own website as… a startup.

And of course, it takes a toll when you watch as the entire risk management and portfolio optimization process is dumbed down to four  words that you are told over and over and over again: What. Are. Your. Assets.

It wears you down. You get tired. You have self-doubt.

But a tough team bounces back. A Detroit team bounces back. Day after day my team fought behind me and we tested, we pivoted, we adjusted, and we iterated. This is what four years of iterating looks like:

We knew the outcome but we didn’t know the path. Here is another graphic I think about often:

And sure enough, slowly, we started to see progress. One day our friends at Sage Hill allocated to one ETF, and then my friend in Charlotte allocated to our other ETF. We formed a partnership with my old friend Larry Medin who was launching a firm called Brandometry. And then we formed a partnership with some of the top industry leaders at Toroso Investments.

Before we knew it we had another partnership, this one with Amplify ETFs, perhaps the most promising emerging company in the ETF industry. And then we formed a partnership with Tidal ETF Services. We formed partnerships with some of the best investors in the country from Argi Financial Group to Acquirers Funds. And then a partnership with SoFi. And then we closed out the year with two more partnerships, SP Funds and ARIS.

And suddenly we are putting out a press release and running a victory lap because we hit $500 million in AUM. But those are the companies that did the hard work, and those are the companies that we owe any success to. Those are the companies whose success we are as committed to as we are our own. Those are the companies who have a Detroit Tough team behind them.

Here is a quote from James Clear’s phenomenal book Atomic Habits: “When nothing seems to help, I go and look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that last blow that did it—but all that had gone before.”

You spend day after day hammering at the rock, and in the Trough of Sorrow you don’t see any progress. I have spent much of the past two years working to create the best podcast I could. Every week I would work on something else – my speech impediment, speaking slowly, prep work, promoting the podcast, audio quality… something different every single week. And for so long it seemed like I was getting nowhere. Until suddenly I look back and can see some results!

The rest of our business has gone the same way. Charles, Josh, Qiao, Eric, Christina grinding and fighting day after day after day through the Trough of Sorrow. And then we look back one day and see that maybe, just maybe, we have crawled out of the trough.

There are bigger firms out there, and there are more profitable firms out there, but we have built ourselves a base. We have reached the upswing in the curve, outside of the trough. And the future is bright. We are talking to some of the smartest venture capitalists in the country about working together. We are building tech-enabled products that can change the industry, that we can create from scratch and bring to our clients to help them manage their expenses and help them compete and grow.

I am thinking about our bright future and writing this note in our Detroit office. The sky is grey and will be until June. July if it’s one of those years. I can see someone walking down the block with a thermos, a lunch pail and a tough look on their face. He is walking to a construction site across the street – used to be a vacant lot there but now they are building a skyscraper. Yah, we fit right in here.

This post first appeared on exponentialetfs.com.

Cap Weight Concentration: Same as it Ever Was, Until Now

The most valuable skill an investor can acquire is the ability to distinguish theory from law. Examples of theory include forecasts, the relationship between gold and inflation, or anything ever written by an economist.

Examples of law include principles of diversification, statistical arbitrage, and mostly, the fact that anything good that ever gets posted online is done on those nights you’ve promised your girlfriend a nice dinner out and your full attention.

Michael Batnick, Director of Research at Ritholtz Wealth Management, posted a fantastic chart online a few days ago, and my phone lit up like a Disney fireworks show.

Phil: “Sorry, we’ve got to get home earlier than expected”

V: “Ok, sure, it must be something important”

Phil: “I have to tweet and blog about company weights within the S&P 500”

V: “…”

This article was published by Yahoo! Finance, please click this link to read the article.

ETFs are the Rule

If you look up the word exemptive in the Oxford Dictionary, you won’t find any results. The word “exemptive”, it turns out, is actually not a word at all.

ETFs have been primarily governed by the Investment Company Act of 1940, which is essentially a rule designed for mutual funds. The “40 act rule”, as the name implies, was written up almost 80 years ago in a generation that could never imagine the efficiencies and varieties of low cost investment options that would become available to investors today. To launch an ETF, an issuer has always had to go to the SEC to get a specific approval known as “exemptive relief” to exempt themselves from the aspects of that same “40 act” which make the fund look… well, not like an ETF. In other words, an ETF issuer gets an approval to launch a mutual fund that isn’t, governed by an ancient mutual fund rule, but exempt from the mutual fund aspects of that rule.

Get it? Don’t stress it if you don’t – the industry is on the verge of getting an exemption from the exemptive relief requirement.

Governing by the exception is an inefficient way to oversee any industry, let alone one that has become the “Silicon Valley of Finance” (hat tip to the incomparable Eric Balchunas for that one). When you govern by exemption, exceptions abound. For example, a couple of fund companies received exemptions to list leverage and inverse funds before the SEC had a change of heart and refused to issue any further leverage ETF exemptions, level playing field be damned. Those early exemptive relief orders are grandfathered in, so the rule has created an oligarchy in an otherwise fiercely competitive market. Similarly, some fund companies can use custom creation and redemption baskets, while others can not. Some fund companies can offer transparent actively managed ETFs, while others also can, basically, but they just haven’t formally asked yet. The system is as inefficient as it is confusing.

But the real story here, governing by exceptions may work for an oddity of an investment vehicle, or a structure on the fringes. The ETF may have started off that way, but it has matured to the point where it is now the preferred investment vehicle of the modern investor. In fact, a recent Schwab survey declared that “Exchange Traded Funds (ETFs) are the investment vehicle of choice for 91% of Millennial investors”.

The SEC announced that they will hold a hearing on the matter on June 28. A new ETF rule could mean that the vehicle is finally being governed by its own rule, the same rules for all, and not by exception.

Since 2009, the mutual fund structure has seen net outflows of $24,439,000,000, while the ETF structure has seen net inflows of 2,102,305,000,000. You read that correctly – net outflows for mutual funds coinciding with TWO TRILLION in net inflows into ETFs.

ETFs are no longer the exception. They are the rule. And it is time for them to be governed that way.

This post first appeared on exponentialetfs.com.

Simple Investing Strategies Stand the Test of Time

Always be sure to do your homework on companies, ETFs and various investing strategies.

Don’t chase the fads.

The most shocking thing about the collapse of Theranos is that people are shocked. Well, I suppose that isn’t fair. The story is shocking, without a doubt. As detailed in John Carreyrou’s new book, “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” Elizabeth Holmes lied constantly about every aspect of her business, its products and anything else – reaching a valuation upwards of $9 billion before reality came crashing down around her.

But the primary deception around the efficacy of Theranos’ supposed breakthrough compact blood-testing technologies really shouldn’t be that shocking at all. Because what has become very clear about the star-studded list of venture capitalist backers, board members, fawning journalists and investors is that none of them understood the technology or bothered to evaluate it for themselves.

This isn’t the first time we have seen brilliant investors left naked and exposed over a shameful lack of due diligence. The documentary film “The China Hustle” has exposed accounting irregularities and what appears to be rampant fraud amid the Chinese reverse-merger boon. Again, investors were exposed after assuming due diligence had been conducted by institutions that, as it turned out, had done no such thing.

This article was published by The Street, please click this link to read the article.

It’s Tough Out There

I should have known because we stopped sending press releases.

This was back, I don’t know, 2012 or so. I was working at the New York Stock Exchange and my clients were ETF issuers. My job was to move the ball forward on market structure initiatives, help issuers get product filings through the SEC 19b4 process, and to generally keep clients happy. The easiest way to keep clients happy was to leverage the NYSE brand to help them promote their funds. And the easiest way to do that was to send out our own press release when they launched a new fund to help get them some media exposure from the trading floor. Or to at least look like we were trying.

We were launching over 200 products a year, and one day our internal communications manager insisted that we stop sending ETF launch press releases. It was hard to disagree when she explained that her media contacts were threatening to exile our email account to the spam box and that an ETF launch was no longer news. Her media contacts were pleading with her to stop sending the press releases, so we obliged. And whatever obvious signal that was to me that the ETF market was becoming saturated clearly went over my head.

As ETF assets continue to explode, the individual new ETF success rate continues to decline. Getting an ETF off the ground requires a two-pronged attack where intra-day liquidity is built in one market and buy and hold assets are built in another. Meanwhile, wirehouse gatekeepers are preening the trees just as RIAs are instituting asset minimums to manage the bombardment of issuer pushes. I’m not going to lie, it’s tough out there.

The Kaufman Foundation (I know, I know) ran a study in 2009 that found that 47 of the Fortune 100 companies were founded during a recession. It is a fascinating study, because it shows that companies that have an easy road during their early years become complacent while companies that have it hard learn to fight, learn to be efficient, and learn to focus on what matters.

We launched Exponential ETFs in 2016, squarely in a bull market for equities, and an extreme bull market for ETF products specifically. So I like the fact that it is tough out there, that we are being challenged and earning our battle scars. We are surviving, we are learning, we are adapting… and soon enough we will be thriving. And if I take my own biases out of it, it SHOULD be tough out there. We are creating investment products for financial professionals who in turn are providing fiduciary services on behalf of real people who have scraped and clawed to save and invest that money. They ate dinner at home instead of going out, they passed on the luxury options on their new cars, they vacationed in Phoenix instead of Maui. They worked hard, year after year, and they saved. So in walks the fund industry telling their advisors that there is a new and exciting way to invest – be skeptical! Be thorough! Be cautious!

Tadas Viskanta writes a fantastic blog called Abnormal Returns. He recently put up a post asking some of the best minds in the industry “What ETF, if it were launched tomorrow, would you invest in with little (or no) hesitation?”

The responses were dispiriting, to say the least. Here is a sampling:

• Robin Powell: “It would be refreshing to have a day without another ETF launch!
• Charles Sizemore: “We arguably have a bubble in ETFs, indexing in general, and even in smart beta.”
• Tom Brakke: “There are too many already.”
• Cullen Roche: “The ETF market is becoming saturated.”

Like I said, it’s tough out there. I had lunch with one of the bloggers from that post about a month ago, someone who I am a big fan of and who I consider to have the perfect balance of free and creative thinking mixed with critical quantitative analysis, and there was one offhand comment during the lunch that just stuck with me and I haven’t been able to shake it off.

I was explaining our new fund launch and our company plans and he said “well, if it works out, you’ll be on a yacht somewhere”. The comment caught me off guard and I just shrugged and agreed in the moment. But it stuck with me because it is such a different point of view than the one I have.

Ending up on a yacht somewhere would be lovely. But that has never been the motivation behind anything I have done or any product we would ever launch. So it stuck with me and I have been at a loss for how to respond. We are in an industry where some charge a 20% performance fee for fund management – with lockup periods and opaque investment methodologies. Exponential ETFs charges 29 basis points for one of our ETFs and 65 basis points for another (which utilizes proprietary data that carries tremendous fixed costs). Our ETFs are fully transparent and designed to withstand the toughest institutional scrutiny on the planet. If we were in it for the money-grab we would be the most incompetent hucksters on the planet.

Let me take several steps back. I grew up a smart ass kid with severe ADD and a disdain for authority, in an environment where there was an emphasis on book learning in schools run mostly by rigid, humorless Rabbis. These two things do not mix. But after serving in the army and learning how to push myself, I went about giving myself an on-the-job education. I started my career as a stock trader, and then on an FX desk working the graveyard shift, and then a product developer. I was blessed with those opportunities and I threw myself into it with everything I had. Even more so, my good fortune landed me in the ETF industry right at the beginning. ETFs are in my blood; I love this stuff*.

*Yes, I love ETFs, and my favorite ETF was always the simple elegance of RSP. Until I level-upped it, which is exactly what we did.

Exponential ETFs was born at the collision of two different paths. Here is one path: a mundane shopping experience led me to the big idea that direct customer experiences in any industry will eventually show up in a company’s bottom line, and I went about looking for data to test that thesis.

Kevin Quigg had overseen one of the most successful expansions of a fund business ever, and was ready to get back to the point where the job was fun and free from bureaucracy. Charles Ragauss was the hardest working portfolio manager in the ETF industry and had just seen his newborn ETFs sold to a firm on the East Coast. Josh Blechman went from being a hedge fund trader to mastering an entirely new skill set. What Qiao Duan had to go through to be a part of this is a blog post I’ll save for a future date.

Meanwhile, the other path, Dr. Claes Fornell had a problem. He went from being one of the premier academics in the country (the author of three of the 20 most cited marketing science papers published in academic marketing journals… and five of the top 50) to being one of the premier entrepreneurs in the country (founding ForeSee Results, CFI Group, The ACSI & Detroit Vineyards). But, his two hedge funds which utilized his customer satisfaction data had three sovereign funds as investors, and those investors were starting to grumble about the fund structure – everything I mentioned: the lockups, the performance fees, the opaqueness.

And then out of the blue some kid cold-called him with a big idea.

Take a look around the ETF industry, because it’s not just us. Something special is happening. Eric Ervin found a way to isolate and optimize dividend investing. Gregg King found a brilliant way to embed a gold investment into an equity position. Jamie Wise built a proprietary data scraping tool that is generations ahead of those used by 2/20 hedge funds. Christian Magoon launched a retail ETF that demolishes any other in the category. Mike Venuto did the same in the financial sector. And these funds are available in the most efficient wrapper, at the most efficient prices. I could go on, and I know I am leaving many out, but it is the same story over and over.

None of these people are selling ETFs because well paid consultants advised them that flows are moving into the vehicle. These are fund strategies built by passionate people who believe in them. Every one of those entrepreneurs has had to fight and sacrifice and grovel for funding, beg for allocations, miss their kids’ soccer practice and lose sleep to create these funds. After all, it’s tough out there.

So where two products diverge in the wilderness, if you insist that only the most well-travelled are worthy of consideration, my ask is that you at least open your mind to the possibility that a better solution could one day be out there. Stay cautious and skeptical, by all means, but also stay open minded to the possibility that someone could build something better for your clients and better for your portfolios, and it just might be sitting out there on the road less travelled.

This post first appeared on exponentialetfs.com.

The Big Systemic Market Structure ETF Risk That No One Is Talking About

It’s not every day asset management firms advocate for the right to pay new service fees. Yet that is exactly what we are doing.

Recently, FINRA put out a request for the ETF industry to comment on lifting Rule 5250 — a rule put in place long before ETFs were recognized as the vehicle of choice for the modern investor, a rule that prevents ETF issuers from properly incentivizing market makers.

As it stands today, ETF market makers are compensated through a “maker-taker” model, paid for providing liquidity and paying in for taking away liquidity. Those rebates are enhanced when taking on market maker obligations, which include continuous quoting of a two-sided market within a predefined spread range and a minimum acceptable amount of depth on the bid and ask.

While any market maker can trade ETFs opportunistically, only the lead market maker enjoys the enhanced rebates that the “LMM” programs offer. However, as market fragmentation continues, the primary listing venues where trading is eligible for the enhanced rebates only see fractional volumes.

This article was published by ThinkAdvisor, please click this link to read the article.

There’s a New ETF Game in Town

The exchange-traded-fund industry is being shaped by a new paradigm — not active vs. passive.

It was the image of dart-throwing monkeys that got me. I would like to think it was the analytics, the white papers or even the raw performance data of active managers over the years. But if I’m being honest, it was that image of active managers as dart-throwing monkeys that really hooked me.

I was in my early 20s and reading Burton Malkiel’s “Random Walk Down Wall Street” for the first time. The way Malkiel wrote about it, there was just something rebellious and cool about the index side of the index vs. active debate — so I became an index guy.

This article was published by ThinkAdvisor, please click this link to read the article.