Credit: Shutterstock photoPaul Hrabal, the president of U.S. One, is unique among ETF sponsors. His fund-of-funds ETF, One Fund (NYSEArca:ONEF), is designed precisely for the small clients big wire houses and many other financial advisers dismiss as unworthy, or worse. While it might be easy to dismiss his plan as just another ETF industry pipe dream, he told IndexUniverse.com Managing Editor Olivier Ludwig that it's worth pointing out that ONEF is steadily, if slowly, collecting assets. After six months, the ETF has about $8 million in assets, or about half of what Hrabal hopes it will gather in its first year. He says ONEF, which he hopes will soon be accompanied by a fund-of-funds fixed-income ETF, is for both do-it-yourselfers looking for a serious and simple asset allocation plan, and for advisers who need an efficient and responsible way to manage smaller clients.
Ludwig: Your whole business is built on the idea that there's room for the little guy, is it not?
Hrabal: Yes. The target market is folks with less than $100,000 in investable assets.
Ludwig: How low will you go?
Hrabal . We're marketing to those with less than $100,000 in investable assets; the 30- to 54-year-old age group, the ones who are still accumulating assets. They might be small now, but they're going to be big later, you know:$50,000 in annual income, college educated. It looks like the average shareholder has about $7,500 in our fund. On average, it's the small guy who is responding to our advertising and who's going after our fund. The guy under $100,000 doesn't get any of that professional advice; no professional portfolio construction; he's left to Money magazine and an 800-number at Schwab.
Ludwig: Left to the dogs, more or less?
Hrabal: Left to the dogs, and what's worse, they probably need more help than the wealthy person, investment advicewise. There are 100 million households in the United States. Our prime market is 11 million households-about 10 percent of the total. We're looking at data that show that 80 percent of U.S. households have less than $150,000 in income and/or less than $250,000 in investable assets.
We've found along the way that this fund can work well with advisers too. When you talk in real life to a financial adviser, they do have the small accounts. The brother of the rich client also needs help, and the adviser agrees to take that guy on, and that guy's got $75,000.
Ludwig: Are you on any wire house platforms right now?
Hrabal: Not really. Wells Fargo has no restrictions. But we're shut out of UBS, Morgan Stanley Smith Barney and Merrill Lynch until we have more assets or have been around longer. It's either assets, length of time or both, and we're not at any of those thresholds right now to warrant their attention.
But frankly, they don't want us. They're not as interested in ETFs. The sweet spot for ETFs in general is with registered investment advisers and the fee-based folks, because ETF companies-iShares or U.S. One-we can't compensate the adviser who's commission based. There are no 12b(1) fees, there are no front loads, there's no trailing commissions of any kind. The advisers who are charging fees as a percentage of total assets are the ones who have adopted ETFs.
Ludwig: There's this $100 million rule in the ETF industry. It's said that if you cross that threshold as an ETF provider, you can breathe a sigh of relief that you're not heading to the ETF graveyard. Does that threshold apply to your company?
Hrabal: Yes. I would say we're dealing with exactly the same threshold in terms of breakeven and having enough adoption to the point where we're profitable. For us, that's a three- to five-year time frame to get there. We're not going to get to $100 million until at least year three.
Ludwig: Are you ahead of your expectations? Are you about where you thought you'd be?
Hrabal: Well, I wanted to be at $15 million on our one-year anniversary, and we just had our six-month anniversary and we're at $8 million. We're building momentum over time, so the fact that we're where we want to be is great. We may end up doing $20 million by the one-year anniversary. That's great, because if we can get to $35 million by year two and get to the $50-$75 million range by year three, we'd be very near profitability.
Ludwig: As far as the asset allocation in ONEF, the one thing that sticks out is the 5 percent-plus allocation to VWO [Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO)]. That seems low, if one is to believe the emerging markets story. Is that a blind spot, or are you skinning the cat differently?
Hrabal: I'm skinning the cat in a different way. We have 5 percent in companies that are listed in emerging markets. That is not 5 percent exposure to emerging markets. My estimate is that we have somewhere between 10 and 12 percent exposure to emerging markets. The S&P 500, for example, has 50 percent of its revenue and earnings outside the U.S. I would say that 10 percent of those companies' international operations are in emerging markets.
Ludwig: But is that adequate emerging markets exposure? People like Jeremy Siegel would say:"Geez, if you're young and you've got that investment window, put 33 percent in there!"
Hrabal: I think people are overly enthusiastic about the emerging market opportunity. I lived in emerging markets when I worked with Dell, so I'm not a stranger to it.
Ludwig: So what sort of insight is your more careful view predicated on?
Hrabal: At this stage in development, there's very little transparency. So, from a shareholder perspective, there's a very high risk that we don't understand exactly the financials and the operations and the influences on companies in emerging markets generally.
Ludwig: Are you saying that, with the actively managed overlay you have at One Fund, that if your comfort level with the emerging markets increases, so too could the ONEF emerging markets allocation?
Hrabal: Yes, absolutely.
But I'm very leery of government control. The fact that the majority of China-listed companies have either government influence or direct ownership by the government makes me very uneasy. I saw it when I was at Dell. The party apparatus has its hands in every aspect of society and every business transaction. And the rule of law in that environment is very sketchy. Contracts mean virtually nothing at the end of the day. And that's absolutely true of Russia too. I've never spent time in Brazil and spent some time in India, and it has its own issues. But Russia and China-they're dangerous environments.
Ludwig: I've read that you're bullish on this country, and I wanted to hear your views on that subject.
Hrabal: I guess I'm bullish both on U.S. companies and the U.S. economy generally. From a strategic point of view, we have the best combination of the most open and free society with good rule of law, shareholder protections; transparency; an entrepreneurial and innovative environment; and a free flow of capital that just makes us a cinch to continue to be one of the dominant countries in the next 30 to 50 years.
We've probably leveraged ourselves too much like many developed countries. But even among developed countries we're far and away superior in terms of our advantages-natural resources, agriculture. I'm very positive, but maybe I'm just totally biased.
Ludwig: All your points seem to be valid, but at the risk of wading into dangerous territory, the sometimes-grotesque sideshow that is Washington politics makes me wonder:Are we going to shoot ourselves in the foot?
Hrabal: What's that expression? "Democracy is the worst form of government, except for all those other forms that have been tried." Is that a Churchill expression?
Ludwig: Yes, I believe it is.
Hrabal: Well, I share that view very much. Yes, we go through periods of gridlock, but the best ideas do rise to the top and we do find long-term solutions.
Ludwig: Well, we seem to be at a critical juncture, and it's not a good time to be twiddling our thumbs.
Hrabal: I just can't wait to see how the whole China vs. U.S. plays out over the next couple of decades. I have this feeling that there is a cliff coming for the Chinese-whether it turns out to be economical or political-that is really going to shock people.
Ludwig: As I look at your company, the obvious blind spot is fixed income. When will you fill that gap?
Hrabal: I just chose to start with the stock fund. We are a startup, so we have limited resources. So I thought we'd start with one fund, and stocks are more appropriate for the asset-accumulator group [30- to 54-year-olds] we are targeting. I thought we'd bring the bond fund later on, once we had traction and gotten clear on what's working from a marketing and distribution perspective.
Ludwig: What's the triggering point when you'll launch the bond fund?
Hrabal: If we hit $15 million by our one-year anniversary, that's probably the triggering event. There's definitely a need and a request for it among existing advisers and shareholders.
Ludwig: What's the pie-in-the-sky scenario for your company, if your wildest dreams were to be exceeded? What would your assets look like if you fast-forward 10 or 15 years?
Hrabal: Ten or 15 years is a long way away, but I think I'd definitely be able to help my target market and make an impact if we were a $1 billion fund complex with up to six funds.
Ludwig: And the time frame?
Hrabal: Who knows? I've been told that the first $1 billion is the hardest! But with every extra, incremental dollar, things start to slowly accelerate. I just read that Global X went from about $100 million in January to $1 billion. They have some hot products and whatnot. We're a buy-and-hold fund for small retail investors, so our accumulation rates will take longer, but our assets will be sticky.
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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.
