Big index ETFs do brisk business, but Rusty Vanneman, chief investment officer of Omaha-based Orion Advisor Solutions, sees a growing appetite among investors and RIAs for investments that tell stories.
“And lots of ETFs have stories,” Vanneman says.
Thematic ETFs are one of four major categories Vanneman sees developing in the industry. “These are built around a story such as clean energy or whatever it may be. And it’s not just the story, but there are also innovative and disruptive ETFs with exciting and sexy stories and IFAs like telling the story,” Vanneman explains.
“They also have pretty attractive returns and from an investment standpoint these ETFs hold stocks that are quirky so they give a slight diversification benefit with lower correlation from the rest of the portfolios.”
The other three categories Vanneman highlights are passively managed funds with broad market exposures; the smart beta or factor-based ETFs which are built around factors such as a valuation measure or a dividend yield; and actively managed ETFs.
Smart beta ETFs are: “An attractive and easy story because many studies show that you can generate additional returns,” Vanneman comments. He predicts huge growth for actively-managed ETFs as well. “More and more active ETFs beat their underlying benchmarks,” he says. “It was first seen in fixed income and now in equities. And while less than 2 percent of ETFs are currently actively managed, and most of those are in fixed income, the huge mutual fund companies are now creating ETFs based on their long term active mutual funds. Our portfolios differ from other ETF strategists in that we have over 20 per cent in active ETFs.”
An increasing number of advisers are turning to outsourcing solutions to help tell those stories, Rusty says.
“The old model [advisers] brought to the table was their investment acumen, and a lot of home offices of adviser or stockbroker firms have now asked them to outsource to give a more consistent experience,” Vanneman says.
Orion Portfolio Solutions, Orion’s turnkey asset management program (TAMP), is designed to help advisers personalise portfolios with wide-ranging access to leading ETF strategists and technology capabilities. This approach aims to help advisers create blended model portfolios and retain full trading discretion with a click of a mouse – which makes it unique in the ETF industry, Vanneman says.
“We are given a detailed investment profile of their clients’ needs. Whether they want growth, income or whatever, we build that portfolio while factoring in other constraints and considerations the client might have.” Additional drivers behind their business growth include better technology compared with mutual funds, Vanneman believes.
He reflects that in the old days, mutual funds offered a glimpse of their holdings every quarter or so.
“Not having daily transparency doesn’t worry me as it will show up in the return stream. Ultimately, if the strategy performs and behaves as it is expected to, I am satisfied.”
