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 Kristof Gleich, president at Harbor Capital Advisors.
Welcome to the show.
Kristof Gleich: It’s great to be here. Thank you so much for having me.
Deborah Fuhr: Thank you.
Margareta Hricova: Harbor Capital has 66 billion U.S. dollars in assets under management and has been managing equity, fixed income and target retirement mutual funds for over 30 years. Why have you decided to enter the ETF industry now?
Kristof Gleich: Most simply put, I think we’re heading from the age of the mutual funds into the era of the ETF. We think that ETFs have some clear, structural advantages, we think they’re going through a period of rapid adoption and we also think they appeal to the next generation of investors. And it’s an area that we’re excited to be part of.
Deborah Fuhr: That’s great. And you’ve listed two active, fixed income ETFs. Why is it a good time to be both active and in fixed income?
Kristof Gleich: Well, there’s a lot going on at the moment in fixed income. The need for high quality income has never been higher, driven by demographics and the ability to get that yield from the market has really never been more difficult with where we are in the interest rate cycle, and general yield and spread compression that we’ve seen across the world. And there’s a lot of uncertainty at the moment as it relates to the pandemic environment, what the recovery will look like, the inflation picture. And so putting that all together, we think clients need high quality, income solutions and we think now is absolutely the right time to take an active approach to help navigate through that uncertainty.
Margareta Hricova: How is scientific alpha strategies different than traditional active management?
Kristof Gleich: Historically, there’s been two approaches to fixed income investing. There’s been the fully passive, low cost, index approach on one hand, which continues to gain market share and to grow. And on the other hand, there’s been the more traditional discretionary or fundamental approach; human analysts analyzing things to try and produce a superior outcome. We believe that there’s a space for a third approach in the middle, which will be filled ultimately by scientific investing. It may be referred to in some circles as systematic. There’s elements of it that are quantitative as well. But really sort of taking this approach means being objective, using technology, using data to be unemotive about making decisions, and by navigating the market with a scientific approach, we very much hope to provide correlation benefits to both a low cost indexing or a fully active approach. And for our clients, building diversified portfolios, that’s very attractive as it has risk adjusted returns and correlation benefits at the same time.
Deborah Fuhr: So now when you think about investing in fixed income, what type of allocation would be appropriate for most investors?
Kristof Gleich: Obviously, advice has to be delivered against the context of a broader portfolio, so working very closely with your financial advisor to make sure that you are allocated appropriately. But at the moment we would be tilting away from duration risk. So that means being sort of underweight, interest rate sensitivity. And we’ve actually seen over the last few days quite a big spike up post the Fed meeting last week in interest rates. And then we feel on the other side of that, within fixed income, being overweight credit. Not all credit, but generally through an active manager selecting those higher quality credits, those safer credits for you, but being tilted towards areas like high yield, but being obviously very careful in areas like emerging market debt, again, because we’ve seen specifically in Asia some flare ups happen over the last couple of weeks.
Margareta Hricova: And what type of investors are using fixed income mutual funds and how are they using them?
Kristof Gleich: So generally, fixed income mutual funds apply to a large opportunity sets of clients here in the US. But the reason that we’ve launched ETFs to complement our mutual fund business, is we think ETFs are appealing for financial advisors directly to consumers. Anybody that really prefers a vehicle that gives them more transparency, cost effective price point, and they can trade sort of intra-day, if they so choose to. And so clients where those attributes are appealing are buying fixed income ETFs today.
Deborah Fuhr: That’s great, and can we expect to see you launch further ETFs?
Kristof Gleich: Absolutely. This is just the beginning. So September 16th was the start of a journey, not the end of a process. That was our most significant new launch since we launched our mutual funds back in 1986. We expect to have more ETFs in the marketplace this year and we’re going to be very busy next year, working with existing partners that we have, so can we bring something in an ETF format that we think would be appealing for our clients and help them build better portfolios? Or indeed, as is the case with our partner in London, BlueCove, can we find newer managers to bring in an ETF format?
Deborah Fuhr: That’s great. Thank you for joining us.
Kristof Gleich: Thank you for having me.
Margareta Hricova: Deborah, can you tell us about some of the other news in the ETF industry?
Deborah Fuhr: Last week we had 34 new listings and 28 new cross-listings. We saw two new products come from Kazakhstan, which I bet many people don’t even realize they have products listed there. Year to date, we’ve seen 1217 new listings and we’ve had 975 closures, which means there’s net more products in the market.
And earlier this week is ESG, so if we go and look at what were the flows to the end of August, we’ve seen that the ESG ETFs have gathered 108 billion dollars of net new assets. The assets currently are 327 billion. So it’s been impressive to see the year-to-date change, 69% growth in assets. We’ve seen 66 months of positive, net inflows going into ESG products. These are clearly products that have resonated very significantly with European investors and also with pension funds primarily. But we are seeing it now really resonate across the entire spectrum of retail investors, financial advisors and institutions, really mostly around the world.
There’s a few countries that rely a lot on fossil fuels and are a little bit reluctant to fully embrace ESG, but we do see that shift happening. The other thing that’s important that came to light is in the US, chairman Biden’s draft legislation to change the tax treatment of the use of in kind redemptions by ETFs, this would be significant because if you look in the US, 12 million US households with a median income of 125.000 US dollars, hold ETFs. And these are the people that Biden said he would not change taxes on, so we’re seeing very significant pushback from ETF issuers, from ICI and others, saying that this is really going to potentially hurt the people that need to save for retirement, putting their children through university, buying a house or something else. So it’ll be interesting to watch how this plays out, although I do not think that it will be passed.
Margareta Hricova: Thanks, Debbie.
And thank you to our sponsors Syntax Advisors, to Kristof, and to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit ETFTV.NET. Thank you.
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