Credit: Shutterstock photoNoah Hamman, founder and chief executive officer of AdvisorShares, the Bethesda-Md.-based company that pioneered actively managed exchange-traded funds, talked to IndexUniverse's Cinthia Murphy about what the Securities and Exchange Commission's recent focus on the world of ETFs has meant for his company's plans, as well as why investors should be willing to pay a little more for active management.
Has the SEC's recent move to take a closer look at ETFs that rely on swaps and other derivatives affected AdvisorShares?
It has definitely affected us because it has slowed things down for us. We've had a dialogue with the SEC about what we are using and what we are doing. So, while their ongoing review of the use of derivatives and swaps in ETFs impacted us, it hasn't changed any of our plans to launch new products. We are still expecting to launch the WCM/BNY Mellon Focused Growth ADR ETF (NYSEArca:AADR)-which is a fund that will seek long-term capital appreciation above international benchmarks-by mid-May.
Do you expect the SEC to make any permanent changes to the use of derivatives in the ETF space?
I think traditional futures and options ETFs shouldn't have that many problems. There's enough transparency there and liquidity to keep them safe from additional SEC regulation. But over-the-counter derivatives that are not so efficiently traded because they usually only involve two parties and aren't as transparent could have some more regulation headed their way.
While the SEC move cast a shadow primarily on leveraged and inverse ETFs, it also impacted active strategies. Do you think active management in ETFs is here to stay?
Active management is essentially the pursuit of alpha. And if you look at the amount of dollars in the mutual fund industry, you see there's a clear demand for active management. ETFs are just another delivery mechanism for these strategies and, in general, they are the best way to deliver active strategies because of their characteristics-accessibility, ease of trade, transparency, low cost.
So, active ETFs are definitely here to stay. We have more products coming up and we've been working with both large and small companies to bring these ETFs down to the retail level. We are in an interesting time in the marketplace, and I see this as the very beginning of a big product growth in the ETF space.
Will active ETFs always trade at wider spreads than index ETFs?
It really depends on the amount of interest and activity there is in a given ETF. There are many ETFs out there with low trading volume but not necessarily with low liquidity, so naturally there will be a wider spread charged for those ETFs. But many with a lot of trading volume should have tight spreads.
Take AADR, for instance. We expect it to trade at very tight spreads because we see it returning as much as 8 percent more a year than the MSCI EAFE index it seeks to beat. Unlike MSCI EAFE's focus on value, AADR will hold a small growth-oriented portfolio. That should attract a lot of trading volume and keep spreads tight.
Why should investors be willing to pay more in fees for an ETF - up to some 1.5 percent in the case of DENT [DENT Tactical ETF (NYSEArca:DENT)] and GRV [Mars Hill Global Relative Value ETF-(NYSEArca:GRV)]? What's the value proposition?
You shouldn't have to pay for beta, for asset management that tracks an index. But our active management performance provides investors with the opportunity for alpha while getting the transparency of an ETF structure.
We think the investment strategy should determine the management fees. Strategies such as DENT, which is tactical, and can go to cash or short, or GRV, which is a relative value strategy with a consistent long and short exposure, are very similar to hedge fund strategies which charge "2 and 20" [percent].
Offering these types of strategies at management fees of 95 basis points is an amazing deal. Also, keep in mind, the 1.5 percent is an expense cap so, naturally when the ETFs are new and have lower assets, the cap serves to protect investors by requiring investment advisers to pay all expense of the ETF over that amount. When the ETF is much larger in assets, the expense ratio should fall well below 1.5 percent.
Let's talk about DENT. Is there too much turnover in DENT?
DENT is a global tactical allocation fund that is a very compelling option for investors looking for that exposure in an actively managed ETF. DENT boasts the transparency and the liquidity that other multibillion-dollar mutual funds in that segment don't. But DENT is a tactical strategy, and as such, it experiences a lot of turnover. But we see that turnover right where it should be.
Don't forget to check IndexUniverse.com's ETF Data section.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
