Presented by Syntax Advisers.
Margareta Hricova Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investment. I am Margareta Hricova. And joining me today is Deborah Fuhr and Brandon Clark, Director of ETF business at Federated Hermes.
Welcome to the show, Brandon and Debbie.
Brandon Clark Thanks for having me.
Deborah Fuhr Thank you.
Margareta Hricova Brendon, can you tell us about the types of ETFs you plan to list?
Brandon Clark We just recently filed for a short-term corporate and a short-term, high yield ETF. This is really kind of the beginning of our entry into the ETF space where we expect to have what is a full lineup of ETFs, both fixed income and equity. We’re a 645 billion dollar asset manager here in the United States, and globally we have about 90 million dollars worth of fixed income long-term mutual fund assets and roughly about 100 million dollars worth of equity, long-term mutual fund assets, and the remaining amonut being money market funds.
So these first two funds being a short corporate and a short high yield really leans into two of our strengths, which is the money market franchise, which is, I’d say, ultra-short mutual fund, as well as our fixed income franchise. These two products are shorter duration, fixed income and really bode well for us as far as where a couple of our core competencies and strengths are.
Deborah Fuhr That’s great, and I know you’re in the quiet period, so you can’t share a lot of details. But can you give us an indication whether these will be new products? Will they be conversions or clones of something existing?
Brandon Clark Our short-term, high yield is a new strategy, and our high yield franchise is a very large franchise here at Federated Hermes. Our short-term corporate has a related performance from an institutional, separate account that we offer.
So they are not offerings that currently exist in a mutual funds format or a mutual funds lineup. So it really fits nicely into our overall investment strategies and expertize, which is technically they’re not offered to the masses when it comes to advisors and retail, because they’re not in a mutual fund, so they fill a bit of a gap in our lineup.
Deborah Fuhr Who do you expect to use the ETFs and how will they use it?
Brandon Clark In the near term we’d expect our financial advisors. We do see increased institutional use over the years with the start of the pandemic. We’ve seen a lot of reports coming in from that, where institutional clients are getting more comfortable and even meeting more on ETFs, because of what I would call the additional liquidity relayer that they bring. So the ability to trade ETFs in the secondary market is great for institutions, but they ultimately have the backstop, which is the underlying assets that the fund owns.
Deborah Fuhr As we look at new entrants coming to market, I’m wondering, do you think we’ll see more firms doing conversions? Will it be clones? We also know that the Vanguard patent on share classes goes away in 2022. So do you think people will embrace that? Because there is an opportunity for mutual funds within the 401K space that doesn’t go away, right?
Brandon Clark I think conversions have some utility for existing asset managers with funds. To what you’d mentioned around the 401K-side; it’s not going to be the means in which you can get all of your assets or all of your investment strategies out to the marketplace, because you do have to be mindful of your existing client base.
I think clones is another natural entry. We’ve seen a lot of that over the years where clients are launching ETFs of existing mutual fund strategies. Some of the financial advisor home offices are getting more comfortable with the idea of having both a mutual fund and ETF of the same strategy on the platform, knowing that it brings different benefits to the end investor.
‘The mutual fund share class structure’-question really comes down to just getting it approved, because it did get carved out in SEC. 6011., from a kind of speed market perspective. So it’s not as if you can just all of a sudden decide you’re going to launch a multiclass, there’s still the process, which could be likely depending on the proposal, based on some of the feedback that the S.E.C. gave in SEC 6011..
Margareta Hricova That’s great. And what are your expectations for model portfolios?
Brandon Clark We’ve actually had models for mutual funds for a while. And I think as we build out our ETF lineup, we’ll look to integrate those into our existing models. And then over time, as we actually have a more fulsome ETF lineup, we would probably look to build out some more ETF-centric models. But I think models have been growing for the better part of 10 years and I think it’s only going to continue.
Deborah Fuhr Can you give us your thoughts on the ETF industry over, say, the past year and 18 months and a brief outlook for the rest of 2021?
Brandon Clark With the pandemic and everything that went on, ETFs probably passed again with flying colors and if anything, have probably brought in more users into the ETF ecosystem. So I think there’s probably more growth ahead. Having been part of some of the non-transparent activities that’s been happening over the last 18 months, I’m curious to see where non-transparent goes. Non-transparent has its utility for certain strategies, maybe not so much for others. It might add some complexity to some strategies that’s not necessary if you really don’t need it.
The innovation never ceases to amaze me when it comes to some of the things that are going on in the Bitcoin space and other asset classes that people are looking to watch ETFs on. So I think, you know, this year I’m really curious to see what the ending number is in cash flow, given where we were in July. Is it possible, depending on the year-end rush, could we get to a trillion? We’re more than halfway there at this point? So it would be a mind boggling number to see, given that’s almost 100% growth year-over-year. But, you know, with all the rapid adoption and more people moving into it, it might happen. It’ll be interesting to see where we end.
Margareta Hricova Thank you so much for joining us and sharing your insights.
Brandon Clark Thank you. I appreciate the time.
Margareta Hricova Debbie, can you tell us about some of the other news in the ETF industry?
Deborah Fuhr Last week, we saw 24 new products come to market from 14 issuers on six exchanges, and there were 27 new cross listings. We saw that Bank of Montreal has partnered to bring out some notes in the US. We saw a lot of activity in Asia, specifically, again, in China. In Canada, CI brought out six more ETFs, so we’ve seen a lot of activity from them. Some in Latin America. And I think the other thing that we’ve seen today is Capital Group, which is known as American Funds, has filed to bring out six active ETFs.
So we’re continuing to see new entrants in the ETF industry, we know that’s on the back of record assets at the end of July, record net inflows in most places and also record new product launches. So this has been a very exciting year and we’re only in the middle of August.
Margareta Hricova Thanks a lot and thank you to our sponsors, Syntax Advisors, to Brandon and to all of you for watching. To watch prior episodes and to see news from the industry, visit ETFTV.NET.
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