Active ETFs: A Conversation with Rob Ivanoff

By  Shishir Nigam

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In May 2010, ActiveETFs | InFocus spoke with Rob Ivanoff, who is the Director of Research at Financial Products Research (FPR). Rob’s work and commentary on mutual fund trends and investments has been featured and quoted in the Wall Street Journal, Financial Times, New York Times and many other newspapers and magazines. Rob was also the contributing author of the first study ever written on actively managed ETFs. He chats with us about how advisors view Active ETFs, how they fit into 401(k) plans and the challenges they face to adoption.


Shishir Nigam – ActiveETFs | InFocus: You contributed to the first study ever on Actively-Managed ETFs, what kind of a response have you seen from financial advisors to these products?

Rob Ivanoff – Director of Research, FPR: Financial advisors for all the sharp suits are not the early adopters of innovative financial products.  They are too busy selling, planning and advising on risk. ETFs were primarily institutional, hedge funds and active trader’s area of interests.  You’d walk into a trading expo and everyone was talking ETFs. You’d walk into advisory office, and you see the same old wholesalers paying for lunch. That all started to change in 2007, when their margins went under pressure and they made many mistakes. They saw the ETF growth at 20+% and they started rebuilding portfolios with cheaper alternatives and more commodity offerings. They had no choice but to embrace the better products because the end user demanded so. However, in studies we did, 48-50% of advisors forecasted correctly the growth of ETFs. Close to 50% of all advisors are saying that over time actively managed ETFs will gain traction and replace actively managed funds, however, most of the traditional manufacturers disagree with that statement. They are starting to look at them and the conversation is heating up.

Shishir: Do you see Active ETFs doing better than Index ETFs in terms of penetrating 401(k) plans?

Rob: The 401(k) space presents a perfect fit for Active ETFs. However, the problem is that a lot of the benefits of the ETF structure are lost in the 401(k) context.  I believe both have a fair shot at representing significant percentage in the retirement space. The 401(k) space is supposed to be pro-investor and yet, it is lacking in transparency, fund selection, and education. We all know we need to do more work here.

ETFs should represent 50% of the choices in these plans. It is puzzling and depressing to watch, all the ignorance and old-boys networking that has kept progress from revitalizing the system. Part of that is exacerbated by fund consulting firms who are too cheap to pay their employees anything other than entry level salaries. On other hand, mutual funds, just like Edison’s bulb, which still exists 100 years later, will continue to be a big part of this space, because of its long-term orientation. Humans hold psychological naiveté and an innate desire to trust human beings at managing risk.

Shishir: What are the big challenges these products face?

Rob: The perils of unproven performance, unwillingness to disclose investment strategy, “wait and see” attitude from the market makers. On the regulatory front I have been encouraging the SEC to work with the ETF manufacturers in teams and see them as the great visionaries they are and not like “this new guy keeps calling me, what should i tell him”. The SEC has a responsibility to embrace and work together with the ETF pioneers, the young relentless talented people who made American investment products the envy of the world. These products are now affordable, transparent and fit for the social good. Why is the SEC so slow and hard to reach? My goal is ensure that our markets remain competitive to London, Frankfurt, and Hong Kong. It should be their goal too.

Shishir: What are the reservations that financial advisors have expressed when it comes to using these Active ETFs in their portfolios?

Rob: It is very simple. Financial advisors are saying: show me performance, tell me a story, and make me trust you.  What is trust built on: reputable history, impressive resources, relentlessly supportive marketing and proactive customer service. Unless these are delivered, no fund firm has a shot at making impact on the intermediary.  You don’t go to sell a product; you go to provide a solution to show them how this product is better than what they are using. Otherwise they won’t listen. You need to learn to hold their hands and still be a mentor. So hire your wholesalers accordingly.

Shishir: Do you still see many advisors leaning towards active management despite the rise of Index ETFs?

Rob: There are two types of advisors. One type is the geek, the reader, the quant, the tinker, he is the type of mad scientist that likes to experiment and adjust the portfolios, navigating risk away, the way Fernando Magellan circumnavigated around the globe 500 years ago. The other type is the natural-born seller, the communicator. He/she will outsource the money management process to its analytical team. We find that both types have one thing in common: they are cost conscious. Both are reasonable and have client’s best interest at heart. And both types like to have indexed and actively managed solutions. While they are actively managing, they are increasingly using index ETFs, which sets the stage for ETFs to proliferate.

Shishir: Do you see growth in the number of Actively-Managed ETFs on the market? What about the growth in the actual money put into these products by investors?

Rob: Actively-managed ETFs (AETFs) are currently amongst the fastest growing financial products. Net sales have grown at 150% and 161% over the past two quarters, and total assets currently sit at $335 million. I expect AETFs to reach $14 billion in assets by 4Q12 and I explained that in the ETF Business Review which we publish weekly. By the end of 2012, we should also have close to 67 products. Let’s put this into perspective:  It took us 100 years to build the best financial markets in the world. During that time it was always the Renaissance man versus the innovators. The innovators – iShares , Vanguard , Schwab, American Funds,  ProShares,  PowerShares made history, took in billions in net flows and became household names. The Renaissance man focused on hiring proven wholesalers, but their business models were backward oriented.  How did they miss an $800+ billion industry? There is so much they could have done.  Many firms will now disappear.

About the Author

Shishir Nigam, CFA, CAIA

Shishir Nigam is a self-professed investing and finance geek with various entrepreneurial interests as well. Wide-ranging investment management experience has given him the knowledge to back his words and insights. Currently, he works full-time at one of the largest commercial real estate asset managers in North America, based out of the beautiful city of Vancouver, BC.

Specialties: Portfolio Management, Fund Administration, Commercial Real Estate, Trading, Investing, Performance Reporting & Attribution, GIPS, Composite Management, Active ETFs, Writing

Disclaimer: In order to make Wealthtender free for our readers, we earn money from advertisers including financial professionals who pay to be featured on our platform. This creates a natural conflict of interest when we favor promotion of our clients over other professionals not featured on Wealthtender. Learn how we operate with integrity to earn your trust.

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