VanEck's ETF Guru: 'We Are Well-Positioned For The Rotation To Equities'

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The red-hot commodity and infrastructure sectors served as engines of growth for one asset manager in 2016. But to hear VanEck tell it, what really helped was its focus on providing innovative solutions for investors.

The $41.3 billion firm can lay claim to five of the top 20 best-performing nonleveraged ETFs last year. Its winning strategies - which tapped growth opportunities in Russian and Brazilian small-cap stocks, as well as in steel, coal and gold - soared as much as 104%.

In an interview with IBD, Edward Lopez, head of ETF product management at New York-based VanEck, acknowledged those successes but took the most pride in the breadth of his firm's asset growth.

One example is an exchange traded fund that focuses on "fallen angels" or downgraded bonds , which proved a hit with investors hunting for income and betting big on an energy recovery.

This smart beta ETF is one among many innovations that VanEck has brought to market. In Lopez's view, investors should look beyond traditional ETFs that follow cap-weighted market indexes.

Smart beta strategies aim to enhance the risk-reward profile of investments. They come with challenges, too.

"Newer ETFs are more complicated and may have stories that need to be explained," Lopez said in an email interview.

The full interview - one in a series of IBD's interviews with industry leaders - follows.

IBD: What were your main accomplishments in 2016?

Lopez: One of the biggest was the strong performance of two of our largest smart beta ETFs, VanEck Vectors Fallen Angel High Yield Bond ( ANGL ) and VanEck Vectors Morningstar Wide Moat ( MOAT ). They validated the potentially powerful effect of a multifactor approach in both equity and fixed income portfolios.

Overall, we saw significant growth in a number of different areas of our business this year. Certainly, gold-related assets contributed significantly to AUM growth, but the growth of our fixed income ETF business has been a bright spot and has helped to diversify our business.

Fixed income ETFs now make up approximately 25% of VanEck's ETF assets and include both taxable and tax-exempt offerings. VanEck Vectors J.P. Morgan EM Local Currency Bond ( EMLC ) saw significant inflows and crossed $2 billion in assets.

It was also a strong year for municipal bond ETFs as assets in several of our nine muni ETFs reached all-time highs.

In May, we teamed up with Ned Davis Research to offer the VanEck NDR Managed Allocation Fund ( NDRMX ). It's a mutual fund that seeks to help investors with core asset allocation decisions by following a model that takes fundamental, technical and economic factors into account.

IBD: What's planned for 2017?

Lopez: In general, we anticipate that equities will continue to do well. This may provide support for some of our targeted sector ETF strategies as well as the various smart beta equity strategies we offer.

We have filed preliminary registration statements for a number of different ETF strategies.

IBD: What are the challenges you face?

Lopez: The dynamics in the ETF industry have changed since its early days. Simply putting out an ETF with a great back test and being first to market doesn't necessarily spell success. We're no longer in the realm of big, broad-based, market-cap-weighted ETF strategies.

Newer ETFs are more complicated and may have stories that need to be explained. That takes time and the marketplace is getting crowded. Fee compression across the industry has impacted core strategies and recently, some multifactor smart beta ETFs.

The industry as a whole, we believe, has to be more thoughtful in determining when and what kind of ETFs get launched.

IBD: What investment trends are you seeing?

Lopez: One of the more interesting trends we're seeing are strategies that incorporate risk management features, such as going to cash to limit drawdowns.

Similarly, with the proliferation of smart beta strategies in the market place, the latest flavor has been ETFs that incorporate a multifactor approach.

The ongoing adoption rate of fixed income ETFs, particularly among institutions, is another major trend we've witnessed. While we think that may continue, rising interest rates may prompt some investors to rotate away from traditional fixed income and into equities or alternative income - be it Treasury inflation protected securities ( TIPS ), floating rate notes, or other equity income strategies such as business development companies.

IBD: How are you responding to changes in trends?

Lopez: Fortunately, we are able to respond to these trends with a mix of existing ETFs and new products in development. We feel that we are well positioned for the rotation to equities and multifactor strategies.

For instance, the MOAT ETF, while not specifically promoted as multifactor, incorporates quality and valuation factors in its security selection rules. Its approach is more intuitive, I believe, than having to explain what a regression is and reflects what many investors already understand to be good investment principles: buying great stocks at great prices.

Our product development efforts have been focused on risk management and alternative income recently.

IBD: What should investors do differently in the new year?

Lopez: Given a new administration in Washington and anticipated changes in U.S. monetary policy, now is a good time to take a hard look at how your portfolio is positioned.

Is it flexible enough to handle uncertainties and volatility? Is it as cost efficient as it could be? ETFs have introduced the ability to access financial markets in so many different ways.

With ETFs, investors can target specific sector opportunities or implement a strategy that has the potential to offer better risk and return characteristics than the generic indexes many of the oldest ETFs are based on.

IBD: Do you expect regulatory constraints to loosen?

Lopez: The price action reflected in the markets after the election seems to indicate that the financial markets think loosening is ahead. However, that's not how we're planning for the years ahead.

ETFs continue to be a core part of our firm's strategy. Their application as a low-cost investment vehicle make sense for many investors regardless of the influence of the Department of Labor (DOL) fiduciary rule.

In October, the U.S. Securities and Exchange Commission (SEC) adopted changes to enhance liquidity risk management of mutual funds and ETFs. The assessment and review of portfolios have always been a major input for us when developing new funds. The new rules codify and add structure to how the industry does this.


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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.

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