Alexander Morris of F/m Investments discusses the world’s first single-bond US Treasury ETFs on ETF TV 

Presented by Syntax Advisors.

Margareta Hricova: Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investments. I am Margareta Hricova and joining me today is Alexander Morris, President and Chief Investment Officer at F/M Investments, and Deborah Fuhr.

Alexander Morris: Thank you for having me.

Deborah Fuhr: Thank you. It’s great to have you, Alex.

Why did your firm decide to list the first single security fixed income ETFs?

Alexander Morris: Well, it was really a matter of necessity. We were working with advisers and intermediaries and other portfolio managers who’ve always found dealing with treasuries, in particular, difficult. They have messy cash flows, they trade in strange and difficult ways, and the answer for many folks has been to avoid them or buy a bucket of securities inside a different ETF that may not provide them the exposure and maturities or other risk factors that they wanted.

And as we looked at rebalancing portfolios in the first quarter of this year for a variety of clients who might not have otherwise held Treasuries, we found we couldn’t really get the exposure we wanted, or if we did, we would expose clients to high fees. So ultimately, that fateful call from an advisor saying, ‘I have a problem, can you help me?’ became what is now three ETFs in the market, with seven more planned to join shortly.

Margareta Hricova: And how do these ETFs work?

Alexander Morris: Just like any other stock standard ETF that you would see, they trade like every other ETF. When you look inside the basket, though, all you’re going to see is a small amount of residual cash in one and only one security. So if we look at our product that trades the ten year security, we rolled that over this morning. So it had the old security, the new one priced and we’ll settle on Monday, and we’ve already made the trade to be in the new security. So your exposure is truly to that on-the-run Treasury, just the same as if you were an individual investor watching the Treasury auction and reacting on your screen.

Deborah Fuhr: And we know that there’s been a lot of single security equity products coming to market. All of them have offered leverage or inverse exposure. Are yours offering leverage or inverse?

Alexander Morris: No. These are direct exposure to the cash bond. Folks have access to lever or do some inverse products, and we’ve had some thoughts around the ability to do that, particularly to allow investors access to create their own spreads inside retail accounts, or without the need for futures or options on futures, which have substantial leverage or other risk factors to them. But for the moment, these are direct exposure to the cash bonds and they are much more easy to trade, easy to carry format.

Deborah Fuhr: And can you talk a little bit about what type of investors you think will use these products and how they’ll use them?

Alexander Morris: I think immediately we believe there’s a healthy professional trader market who have otherwise had to use more difficult to manage trade securities, or securities that had more inherent leverage of risk that will now use these as a day trading vehicle. But we also see them as a complement to some of the multi-bond, Treasury ETFs out there for advisors or CIOs or outsource CIOs or institutions, who want either the convenience of not having to process the rolls in the same way that JLD did for gold, and OIL did for oil, and SPY did for the S&P 500, as well as those who now can use this as a way to quickly manage duration or maturity without having to sell their existing holdings.

Margareta Hricova: And why would investors buy an ETF on one bond vs buying an ETF that tracks fixed income benchmarks or that is actively managed?

Alexander Morris: Without saying that the active or passive debate will be settled today, folks who would look at this would really look at the Treasury bond itself and might pass on buying it because it’s cumbersome to do so. And if you’re in a Treasury product or have a mix of Treasury products today, this allows you to very surgically change where you position yourself on the curve.

And through the magic of the ETF structure, we have a preferential capital gains treatment when the rolls do occur, as well as the ability to now use our accrued interest payments to create a dividend on a monthly basis as opposed to semiannual. Or if you roll your security regularly, you’d never actually get an interest payment, just an interesting accrued interest and then a tax form at the end of the year to try to work out how you got there.

And additionally, you’d find that many of the investors who already have Treasury exposure can now look at the curve, create a spread, or using the options that were recently listed, articulate a truly institutional caliber level of sophistication in any account.

Deborah Fuhr: So you’ve brought three products to market, a ten year, a two year, and a three month. Do you think you’ll bring other products to market in the fixed income space?

Alexander Morris: In the most immediate sense, we have the ability to launch up to seven more ETFs in the Treasury space as we look to fill out the remainder of the US Treasury curve, likely starting with the 30 year product and then filling in the shorter end and then towards the middle.

But ultimately, market demand will drive what comes next, and thanks to LinkedIn and social media, lots of folks have given us interesting opinions on where we should go next. Beyond that and beyond Treasuries, our PMs here have had lots of thoughts of other ways to restructure more traditional credit and ETFs that provide different views as well as even actively managed credit and equity products.

Deborah Fuhr: That’s great. Thank you very much for joining us.

Alexander Morris: Thank you for having me.

Margareta Hricova: Debbie, can you share with us some of the other news in the ETF industry?

Deborah Fuhr: Last week there were 17 new listings and 34 new cross-listings.

Year to date, that takes us to 860 new listings and 1136 new cross-listings.

We actually have taken in another $42.6 billion of net inflows during the month of July. This is the 38th month of consecutive net inflows.

During the first seven months of the year, we have seen $505 billion coming into the ETF industry, globally, which is the second highest amount of inflows at this point in the year, only behind last year, were at this point it was 740 billion. So we are actually having a pretty good year.

When we look at where the assets are, you know, it’s been a very difficult first seven months. Last month was a bit better and we’ve seen that the assets now are back to 9.37 trillion. When we ended the year last year, they were at 10.3 trillion. So a bit better than where they dropped to, which was 8.3, but not back to where they were at the end of the year, that record level.

During the month of July, the majority of money was going into fixed income ETFs. And we have seen that some of the regions around the world have had net outflows during the month of July. We did see that there were a small amount of net inflows going into crypto products, which is also been in the news a lot lately. So those are some of the brief updates from the past week.

Margareta Hricova: Thanks again to Alex for joining us this week and to our sponsors, Syntax Advisors, and of course to all of you for watching.

To watch prior episodes and to see news from the ETF industry, visit us at ETFTV.NET.

Thank you.

ETF TV News does not provide investment advice nor recommend products.

Published on August 17, 2022