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ETF Prime: Tom Hendrickson on the growing popularity of alternatives

In the most recent episode of ETF Prime, host Nate Geraci and Tom Hendrickson, VettaFi’s chief product and innovation officer, talk about the strong interest in alternatives in 2022. Geraci was later joined by Giang Bui, Head of U.S. Exchange Traded Products at Nasdaq, to ​​discuss ETF trends in 2022 and a look ahead to 2023. Finally, Kristof Gleich, President and CIO of Harbor Capital Advisors, discussed the approach Harbour’s ETF investment portfolio and spotlighted their funds.

Prolonged market volatility in 2022 has created an environment in which many alternative strategies that previously struggled are now showing strong performance. However, the alternatives are not just a vanilla strategy, often using complex components and approaches that require a solid understanding of what exactly lies under the hood before investing, Hendrickson warned.

Changes in the market and economy this year have caused “advisors to think about things differently and I think that’s where we’re seeing an increase in research in this area,” Hendrickson explained. The inherent complexity of alternatives has long proven an obstacle for advisors, creating a sort of “black box” around alts that VettaFi strives to deconstruct through offerings such as livestreams, webcasts and research.

The alternatives shine in the eyes of advisors

Geraci pointed out that it is the unique nature of ETFs and their ability to “democratize investing” that has unlocked alternative strategies that were previously only available through hedge funds or institutional investors, sparking a wave of of interest and research on alternative ETFs.

Hendrickson has gathered data on advisor interest in alts from the fourth quarter of 2020 as a baseline and by continuing advisor research on alts on the VettaFi platform. “What I saw was an extremely noticeable trend,” he explained, detailing flat interest during 2021 compared to 2020, then a 30% increase in interest in the first quarter of 2022, a 60% increase in the second quarter, a 62% increase in the third quarter and 70% so far in Q4 (all compared to Q4 2020).

Managed futures soar in 2022

Alt ETFs that saw huge engagement on VettaFi’s platform in 2022 are managed futures contracts, which take long and short positions in the futures market across a variety of asset classes.

Major ETFs include iMGP DBi Managed Futures Strategy ETF (DBMF) which crossed the threshold of $1 billion in assets under management in 2022 after starting the year with just $60 million, as well as the KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) which saw strong entries this year. Other managed futures ETFs that saw inflows in 2022 include the ETFs Simplify Managed Futures Strategy (CTA) and the First Trust Managed Futures Strategy Fund (FMF).

Managed futures, and alts in general, can offer strong value and diversification opportunities for portfolios and have been extremely attractive this year, outperforming when bonds and equities both struggled. However, because these are complex strategies, advisors should do their due diligence to understand how each individual strategy works before incorporating it into a client’s portfolio.

Key takeaways about ETFs for 2022

The continued growth and popularity of ETFs and ETPs has meant that the Nasdaq has tripled its ETP team over the past year, as well as adding more than 100 new or transferred ETPs to the Nasdaq exchange and 20 new listed issuers at the Nasdaq. The Nasdaq has also worked to improve ETF trading this year, refining its bid collars and adding investor protections, as well as strengthening investor education.

Giang Bui, head of U.S. exchange-traded products at Nasdaq, explained that the growth of the ETF industry itself was remarkable for 2022, with more than 3,000 ETPs listed on the exchange for the first time, rising 2,000 listed in just five years. . “ETF inflows are still very strong: we’re at around $570 billion this year, so we’re on track to be our second-best year ever.” 2021 takes the top spot with $933.5 billion in ETF inflows.

This is a strong counterpoint to the $790 billion in mutual fund outflows and shows the growing preference for the ETF wrapper.

Another point of interest was crypto volatility, but more specifically crypto futures ETFs and their ability to perform as expected in an environment of pronounced volatility and massive volumes following the FTX crash, following prices with spreads tight and high liquidity. This “really reinforces the story that ETFs are resilient; they become a vehicle for liquidity in times of stress,” Bui said.

Looking ahead, Bui believes that conversions from mutual fund strategies to ETFs will continue to be a big trend, that major equity market regulatory proposals will be introduced, and that continued flows into ETFs will even occur. in the event of a recession.

Harbor Capital enters the ETF industry with a bang

Harbor Capital Advisors launched its first ETF late last year and now has 11 ETFs it has released, including eight launched this year. Kristof Gleich, Chairman and CIO of Harbor Capital, explained the firm’s established track record over the past 35 years and its shift from catering primarily to institutional investors to making its strategies readily available through ETFs.

“We believe ETFs are both the present and the future of investing and have many advantages over other vehicles,” Gleich said.

The Harbor Scientific Alpha Income ETF (SIFI) and the Harbor Scientific Alpha High Yield ETF (SIHY) were the first ETFs launched by the company in 2021. Harbor Capital believes that to consistently generate high risk-adjusted returns, investors must continually innovate. Both SIHY and SIFI take science-based and thematic approaches to bond investing and use systematic and quantitative strategies, an approach uncommon in fixed income.

The Harbor All Season Inflation ETF (HGER) uses commodities to hedge against inflation, dynamically adjusting its commodity exposures based on the stage of the markets’ inflation cycle. It’s likely that this strong dollar environment that we’ve been experiencing is coming to an end and everything is preparing well enough for gold versus other commodities to do quite well.

Listen to the full ETF Prime conversation here:

For more ETF Prime podcast episodes, visit our Prime ETF chain.

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