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These days. We're all investors trying to be smart with our money,
despite our worst impulses. But at iShares,
we believe that deep down inside of every investor is a better investor.
One that's just waiting to be let out.
Explore iShares ETFs and insights and let your best investor out.
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Now it's time for ETF Prime,
where we discuss everything you need to know about exchange traded funds and the
world of investing. Whether you're an investing expert or just starting out,
Nate will help you get up to date with what's happening on Wall Street and show
you how exchange traded funds can help lower your investment costs,
reduce your tax bill,
and allow you to take advantage of investment opportunities around the world.
And now the host of ETF Prime, Nate Jue.
All right. Joining me this week will be John Suer,
co-founder and president of Innovator ETFs, who,
I'll tell you what Innovator is having quite the year so far.
I show nearly three and a half billion dollars has gone into their ETF lineup
in 2022.
They're now at nearly 9 billion in assets overall.
And for those of you already familiar, uh, with innovator,
you probably already know the story here,
which is innovator offers what are called defined outcome
ETFs or buffer ETFs. Uh,
these are products that allow you to gain exposure to various equity markets
up to a certain cap, and then there's a buffer to the downside. So, for example,
they have an ETF that allows you to get s and p 500 price exposure
over the next year up to, say,
a 15 or 20% cap,
and then you're protected from the first 15% to the downside.
And as you can imagine,
because of the market environment we've been in this year,
where the s and p 500, now down,
what about 21% defined outcome ETFs
are getting some more looks from investors and advisors. Uh,
so John and I are going to dive into these ETFs this week.
We'll talk about how they work, the pros, the cons,
and then we'll also spend a few minutes discussing their most recent ETF launch,
which this is interesting.
It's a risk managed Tesla etf,
so a single stock ETF that has an upside cap and a, uh,
downside buffer on the price of Tesla stock. So, uh,
look forward to discussing that. Also,
joining me this week will be Rich Kerner Senior ETF sales
specialist at Touchstone Investments,
who actually just entered the ETF space back at the end of July. Uh,
they now have four ETFs already, nearly 200 million in assets, by the way.
And these are what I would call high conviction, actively managed strategies.
There's two equity ETFs and two fixed income ETFs,
all using the, uh, transparent ETF wrapper.
So Rich will give us the backstory on why Touchstone enter the ETF space
and how they're attempting to differentiate here. I,
I will say they have a unique model where they're using subadvisors for their
funds, so we'll certainly get into that. Now, to start this week,
really excited about this. I have on the line with me, Roxanne Islam,
who is associate director of research at vfi,
making her ETF prime debut, by the way. And she will be a,
uh, a regular contributor moving forward. I,
I think you're gonna find her various areas of expertise to be, uh,
rather intriguing and certainly a nice addition to this podcast.
So let's chat with Roxanne now.
Now we're joined by the experts at vete,
a new data analytics and thought leadership company that is transforming
financial services from an industry to a community one relationship at a time.
An.
Area that I've been talking a lot about is Bitcoin versus gold.
So right now in the environment that we're in, um,
a lot of investors are concerned over those rising rates.
Roxanne, welcome to the podcast.
Hi. Thank you. I'm really excited to be here.
Yeah. So look, we have a, uh, a great topic to dive into this week.
But before we do that,
since some of our listeners may not be familiar with you and your background,
uh, just tell us a little bit about yourself and,
and your current role with tfi.
Yeah, sure. So, um, great intro. We already gave on me, Roxanne Islam,
Associate Director of research at tfi. Um, you know,
my career in ETF started many years ago at Wells Fargo.
I worked in close end fund and ETF research. Um,
but then I sort of switched gears and for probably six or seven years,
I worked in Sufi equity research covering individual stocks and transportation
logistics and electric vehicle industries at Staple.
And it wasn't until last year in 2021 that I joined Bey through
what was one delirium. And I cover our thematic indexes,
which include anything from Easys to E-commerce to blockchain.
And I really incorporate a lot of that research from my early careers and look
at those mega trends, macro economic data, et cetera,
while also doing some of that in depth stock analysis on the constituent.
Well, I certainly look forward to having you as a regular contributor to, uh,
ETF Prime. I I think we could use a little more expertise,
particularly in the thematic space, which, uh, is clearly, uh,
one of your areas of expertise.
And that's actually where we're going to look this week.
So we're gonna look at two thematic ETF categories that I,
I find both of these pretty interesting, those certainly different.
So electric vehicles in crypto. And what I like about this,
we'll get into some details on the categories themselves,
but I think more importantly,
you're gonna paint the picture for us of how when investors are evaluating
thematic ETFs,
they really need to separate the buzz from sort of the
reality of the situation.
Because investors may hear about certain companies within a thematic category
where there is a lot of media buzz and hype, and investors get excited,
they want to own these companies.
But then when you actually look at the reality of the situation in terms of what
these thematic ETFs hold,
the buzzy companies aren't always there, right? So there can be this, uh,
mismatch between what investors might expect and what they're actually getting
from thematic ETFs. I guess anything you would add to that before we, uh,
get into some detail here?
Yeah, I mean, I'll just say that, you know, it's Amatic ETFs. They've,
they've been around for for years,
but I think they just really shot up around that
20 20, 20 21 timeframe.
And I think it's really important to remember what was happening during that
time period. Cause even though it wasn't that long ago,
it was just completely different environment than what we're in right now.
So that was when, you know, broader equity markets were doing well,
and we saw the emergence of all these specs and stocks and crypto became
really popular. So investors were just becoming much more confident.
They were attracted to these individual stocks that were in the media or on
Reddit, and they were returning these massive amounts in short periods of time.
And a lot of investors were maybe thinking that they're buying the next Tesla or
the next Amazon or the next Apple.
And I think this sentiment sort of bled over to thematic investing. You know,
when I think about thematic investing, it's not necessarily all about that high,
the, that glamor, it's more than that.
It's really investing in a long-term trend that's based on any sort of shift
in behavior or technology or even regulations. And many,
but not all of the holdings are individual stocks and are growth oriented and
higher risk reward stocks.
So there is a bit of crossover between some of these new stocks,
hi, hyped up stocks and thematic investing. But, you know,
while there are some ETFs that, that may even focus on these specific stocks,
the majority of these, um, thematic ETFs are built around indexes.
And they have these revenue streams, these market cap streams,
trading streams that aren't typically inclusive of these highly volatile stocks.
And I think that's where a lot of that misalignment comes from.
Okay,
so that is the perfect jumping off point because let's get into the electric
vehicle category in particular, which by the way, that is a, uh,
a crowded space on the ETF side, and we should probably talk about that as well.
But you've previously written about how, uh,
there were a lot of new entrance into the electric vehicle industry when you
look back at 2020 in 2021. And of course there was a lot of, uh,
associated media attention as well.
But then when you start looking at index and ETF construction,
those companies, uh, aren't always there. So let's start there.
Explain what's been going on in the electric vehicle space in particular.
Yeah, so I think this sector is really interesting cuz you,
you kind of have these two separate stories happening at the same time,
you know, particularly within the passenger EV space,
which I think is one of the, the more interesting, more relatable, um,
portions of the EV industry. So first, you know,
you have these new entrance startup companies that are building these really
cool high tech cars,
and it all seems like they're trying to catch up with Tesla,
which has probably over 70,
75% of the market share for battery electric vehicles within the us.
And then you also have the legacy automakers.
And these are the companies like Ford Toyota, and they're,
they're recognizing that regulations around vehicle emissions are changing.
So they're slowly attempting to shift production from the standard internal
combustion engine vehicle to electric vehicles.
So I think investors and,
and consumers in general are more excited about the new entrance story.
At first, you know, not only were these products really flashy in high tech,
but then the stocks were extremely exciting. Um, and you know,
a lot of these companies, they could eventually be big players in the space,
but you know, right now it's still extremely early. And, you know, honestly,
it's not easy building an easy, it's, it's a very high tech,
large expensive product. And then you combine that with supply chain issues.
And many of these, uh, new entrants that you see in the space,
they haven't even really started production or hit revenue yet.
So that's sort of the reality of the EV space in general.
A lot of new entrances and some seem very promising, but not much concrete yet.
It's, it's mostly based around Tesla. And then you have the legacy automakers,
and then you have this recording industries like the batteries and charging
infrastructure. So when you look at EV ETFs,
they actually end up reflecting that market and not really those smaller
high risk stocks that may get some of that disproportionate media attention.
Um, you know, when you look at these ETFs,
most are built around these rules based indexes. Um,
they actually end up sort of hedging that exposure to some of those smaller,
more volatile stocks. Um, you know, for example, there's revenue restrictions.
And as I was saying,
a lot of these companies haven't even hit production or revenue yet. Um,
and then, you know,
maybe even easier to understand there's market cap restrictions.
So I'll give a few examples.
So when you're looking at ETFs like C A R D or D R I V,
those are both EV indexes, they both follow, uh, sorry,
both EV et ts they both follow indexes that have minimum market cap
waitings of I believe 500 million.
But you're eliminating a lot of these smaller EV companies like, um,
electro mechanica for instance, tickers, So l o um, for instance,
that only has like 150 million market cap and just starting to go into
production. So companies like that are sort of,
they're either not present in the index cuz maybe they cap the index at a
hundred or if you're looking at some of these more, um,
cohesive ETFs indexes, like the ETF id R v,
they have a slightly lower market cap restriction, 300 million I believe.
So you do see a lot of the smaller EV stocks in them,
but even then you were looking at a market cap weighted index,
market cap weighted etf.
And so the weights you have there are well below 1% for, for that sort of stock.
So I think that there's some disconnect between what you'd expect,
the stocks that are getting the media attention and reality.
And that's why it's really important to know the theme you're trying to capture
versus what's actually inside your etf.
I can hear your colleagues, uh,
Todd Rosen blue's voice in the back of my head saying,
You have to look under the hood,
which of course is perfect looking at electric vehicle ETFs,
but it's amazing like the tickers that, uh, you, you just threw out.
So cars C A R Z, that's the first trust. NASDAQ Global Auto Index etf,
um, iDrive, I D R V, that's the iShare self-driving EV and tech etf.
I mean, I could go on here. Global X has one, which is D R I V.
Fidelity has one FD r v simplify, uh,
Spider Crane shares, uh, Smart ETFs, there's a smart etf,
smart Transportation and Technology etf, ticker Moto M oto,
Capital Link NextGen Vehicles and Technology etf. I mean,
there's a lot of products out here. What,
one thing I'm curious about as you went into some detail there, do you view, um,
battery tech ETFs as a decent proxy for playing the
electric vehicle space? I, I ask only because, uh,
obviously battery technology is such a critical factor in electric vehicles and
we have seen some ETFs come to market over the past few years. So like I,
I think of the global x lithium and battery tech etf,
L I t Amplify has a lithium and battery tech etf, ticker,
B A T T A, Wisdom Tree, W B A T.
Do you view those as a decent proxy for electric vehicles?
So I think it's a little tough to answer,
I think somewhat because if you look at these battery tech ETFs, um,
there's actually a lot of crossover between the holdings because these EV ETFs
do hold supporting industries like batteries, infrastructure, et cetera. Um,
and if you look at the correlations, they've actually performed,
I'd say about 0.7 to 0.8, um, correlation. So it's pretty high.
Um, but there are some key differences. For instance,
when you're looking at these battery tech ETFs, they do have higher exposure to,
to places like China. You know, a lot of the materials being mined are,
are not from the us Um, and you know,
also you do have that exposure to materials to commodities, which has done,
done a bit better than some of the the other sectors, um, of,
of the s and p for instance. So when you look at the battery tech ETFs,
it looks like some of them actually outperforms, um, the EV stocks, uh,
year to date at least. So, so it it's pretty interesting cuz yes, you're right,
you can't have an EV without the battery. That's,
that's basically what makes it an electric vehicle. Um,
but I think there are some key differences that could possibly have the two
diverge in the future.
You, you, uh, briefly mentioned performance there.
If we put aside the very important need to obviously look under the hood of,
of all of these ETFs,
do you have any thoughts on the broader market environment around, uh, the,
the EV or, or battery tech category? Because I,
I look at the performance of electric vehicle ETFs and battery tech ETFs,
many of these are down fairly significantly more than the s and p 500.
So do you think this is the same story as with, uh,
sort of the broader disruptive tech category overall high growth stocks where we
have higher interest rates just punishing everything?
Or do you think there's more to it here?
Yeah, I mean, I think a lot of it is that these are higher growth, um,
sort of disruptive tech oriented stocks inside.
So you do see a lot of that negative market sentiment, especially now.
But I do think there's a key difference between the EV space and
some of the other thematic spaces.
I think the EV space is actually sort of as concrete as you can get
when you come to systematic idea because we do know that there are these
regulations coming into pipeline, some as soon as 2030, um,
and not just within the US globally that we need to switch to these cleaner
emission vehicles. So electric vehicles are happening.
It's just a question of how do you capture that, how it materialize?
Will it materialize through these legacy automakers will materialize through
these new entrance or will Tesla just, uh,
hold that market share in the future? So I think that's the real question,
is really how to capture it. And I think that's sort of the beauty of,
of an ETF is it can sort of diversify away some of that single,
single stock risk that you get when you're trying to find the next Tesla out
there.
One thing I'm always curious about, you look at this category,
I I I mentioned earlier, there's a lot of competition here. When you look at a,
a thematic ETF segment like this and you see so many products out there,
what in your mind is the recipe for success?
What do you think determines the winner's longer term here?
Um, so you know a lot, you're right, there's a lot of these ETFs out there.
A lot of them look very similar. A lot of them perform very similarly. Um,
I think it's key to remember that a lot of these scenes, not just EVs,
but they're in their early stages, they're constantly evolving, evolving.
So you have to build an index or ETF that's broad enough to encompass
that theme and account for how that theme will change. Um, for instance,
I'll just use EV for example.
There's a difference between electric and autonomous vehicles and I don't think
many people really really realize that.
So there's not really yet any fully autonomous vehicles,
but there are some in the works.
There's also electric vehicles beyond cars and trucks.
There's electric aircraft, there's electric passenger drones,
and there's actually already several public companies in that space.
So you have to sort of anticipate all this and, and build this into the index,
into the etf.
Otherwise you're looking at constant methodology or strategy changes and you
have too many of those, not necessarily good thing.
And I think on the other hand, you also have to worry about being too broad,
especially Andy's market pathway indexes.
Cuz otherwise you end up having something really similar to the NASDAQ 100.
Clearly your area of expertise,
which I think you're demonstrating very well here today is, is thematics. I,
I'm just curious. Well, you know, look,
we're not here to dispense investment advice, uh, you know, on this podcast,
everybody do your own hor uh, homework,
but how do you view thematic ETFs in the context of a portfolio overall? Like,
like how do you think investors should use thematic ETFs?
Yeah, so I think we touched on this a little bit earlier, but you know,
a lot of these are a higher growth, higher risk reward investment.
So for most investors,
they should be a smaller portion of the portfolio use maybe as a supplement to
broader core holdings. Um, alternative. Alternatively,
I think there are certain spaces, um, that could be used as sector replacements,
like easy ETFs, for instance, could replace an automotive etf. But you know,
in general, these aren't going to be your, your core holdings in your portfolio,
right? These are just, these are gonna supplement some of your, your broader.
Holdings. Yes, well said. You,
you have the core and then you can add a little spice to it with thematic ETFs.
Yep. Um, alright, so a few minutes left. Let's, uh,
quickly pivot here to one of my favorite topics, crypto and,
and blockchain ETFs, which is another very crowded, uh, category by the way.
Um, I,
I guess broadly maybe using the same type of lens you just used for electric
vehicles, I mean,
what are a few key considerations investors should be aware of of here as you
look at this space?
Yeah, so a lot of similarities to draw between the two spaces actually. Um,
it's important to remember this sector is also sell very new. Um,
if you think about Bitcoin itself, it's been around, you know,
less than 15 years at this point.
And some of these crypto and blockchain equity companies,
they've only been around for a couple of years.
And I think over the past couple of years when we saw, um,
you know, the market outperform,
this was a segment that was largely sentiment based.
And I think now there's actually a shift and there's a lot happening in the
pipelines. Um, you know, a lot of regulations,
a lot of institutional adoption that sort of makes the industry more established
and more legitimate. So I don't think it's really, um, you know, run its course.
I think there's still a lot of room for it to run. But, uh, you know,
regardless, I think it's another important area for investors to do,
do diligence then and really understand what you're investing in.
And so I talk about this a lot, but there's a ton of different, um,
blockchain crypto ETFs. So for example,
if you're an investor that really just wants to track the price of Bitcoin
through an ETF product, they would use something like the itto, which is a,
a futures based etf, which with a high correlation to Bitcoin.
But then on the thematic side,
you have blockchain and equi crypto equity ETFs like, uh, D L K and,
and S A T O, which hold companies that support this whole ecosystem.
And with that, you're getting some exposure to the Bitcoin prices,
but it's similar to the concept of ED ETFs where you're actually trying to
capture a shift.
And with EVs it's that shift from the traditional automobile electric cars.
But with watching ETFs,
you're mostly investing in that shift in financial markets and maybe that shift
from internet to web three. Um, so I think it's just important to remember,
like some of these popular blockchain ETF can also get pretty broad and it's not
necessarily a bad thing. I think it depends on what you're really looking for,
what you're trying to invest in. As I was saying,
you have some like LCN and BL KC and those sort of extent
that that market to some of those blockchain adopters and enablers.
And there you sort of get more of an exposure to those diversified tech
companies. And like I said, not necessarily a bad thing,
you just have to make sure that what you're investing in lines up with your
expectations.
Well, Roxanne, absolutely fantastic perspective this week. Certainly, uh,
look forward to having you regularly contribute on this podcast.
Thank you for joining me.
Yeah, thank you so much. I had a great time.
That was Roxanne Islam, Associate Director of research at Vet five.
This week's episode is brought to you by Goldman Sachs Asset Management ETFs,
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Is the distributor of the Goldman Sachs ETF funds.
My next guest is John Souther,
co-founder and president of Innovator ETFs,
who currently offers nearly 90 ETFs about 9 billion
in assets.
This for an issuer whose first product only launched in August of 2018.
Pretty impressive. And you look this year,
their lineup has taken in close to three and a half billion dollars in new
money. Now, of course,
innovator pioneer the defined outcome etf, uh, category,
and they've continued to innovate here, uh, pun intended. So for example,
they recently launched the Innovator Hedge Tesla Strategy
etf, ticker tsl h This is a, uh,
risk managed single stock etf. Uh,
they offer a number of other risk managed products as well, including on the,
uh, bond side. And I now have, uh, John on the line with me from Chicago.
John, it's a pleasure. Welcome to the podcast.
Nate. Thanks Nate. Uh, happy to be here today. Thank you. All.
Right. So look, I know, uh, nobody likes to see the market go down,
but if we're being honest,
this has to be just the type of environment innovators been waiting for,
where I I feel like your product lineup can really shine. And as I mentioned,
I mean nearly three and a half billion dollars into the Innovator ETF lineup
this year. I,
I have to assume it's been at least a little bit easier to find an audience this
year now that everything's not just, uh, going up in a straight line.
Yeah, that's, yeah, that's exactly right, Nate. I, it's, um, I, you know, you,
you hate to capitalize on, on, you know, scary times in the market. Um,
but you gotta remember, you know, when we first launched these, as you said,
it was in August of 2018, and that was at a very different time. You know,
we were on a 10 year bull market and, you know,
the thought of a a defensive type product was, you know,
at that time fell a lot of deaf ears. And, uh,
volatility was at an all time low. And, um, you know,
so our caps were lower as a result, and, uh, rates were down low, so it,
uh, caps were lower. And so, you know, we,
we launched the products into a really tough environment for,
for protection and, and, and downside buffers and, and that type of thing.
And so, um, yeah, we had to lay the groundwork and it finally, um, you know,
the the market cooperated, uh, if you will, uh,
in the last last year for sure.
Well, and just to give listeners a data point, I mean, I,
I feel like innovator has been, you know, pretty successful from the get go,
but that three and a half billion in inflows so far this year,
that's more than doubled your previous best year.
So I show in 2020 and 2021, both of those you took in around 1.4,
1.5 billion. So I, I think it shows that acceleration there. Um,
John, we're gonna get into some of your, uh, ETFs obviously in more detail,
but I do want to take a quick step back here because I'm guessing some of our
listeners might not be aware that you actually co-founded Power Shares,
which of course is now under the Invesco brand fourth largest ETF issue. Again,
I don't wanna get off track here, but I, I always love a little ETF history.
Can you just tell us a a bit about that experience,
maybe how you got involved with Power Shares and what that ride was like?
Yeah, yeah, it was, um, it was a different world back then. Um, you know,
I I would say, you know, the, the biggest difference is,
is people didn't even really know what an ETF was. And those, that,
that did understand 'em back in the early two thousands, they were, are,
were aware of 'em. They didn't really understand how they worked. So, uh,
so yeah, it was a really exciting time. I,
I barely knew what an ETF was back then myself. But, um,
you know, and what I think what we were trying to do when we,
when we started Power Shares was I, I, you know,
my background had been quantitative analysis and, uh,
trying to pick stocks through, through, uh, you know, computer algorithms,
that type of thing. And so we, we thought, you know, what, if,
if we're gonna select stocks or try to outperform the market, why,
why would you put that into a mutual fund rapper?
Why not try to put that into an ETF wrapper? And, and like I said, back then,
I didn't even really have a full appreciation of,
of what the ETF wrapper did or provided. Um, and,
and really the primary thing that, uh,
the ETF wrapper provides is not only liquidity and that type of thing,
but it also, uh, allows you to, to tax manage the funds, uh,
very well. And so, you know, we, you know, PowerShares, we,
we never paid to cap gain distribution for any of our products or any of our
ETFs, uh, for, for decades and or a decade at least until I left.
But, um, and that's, you know,
nothing to do with our savvy tax management ability is just the,
the in kind mechanism of an ETF allows you to, um,
you know, tax manage in a very efficient way. So, so we were really, you know,
the, the PowerShare story was like, Hey, this has been,
people are doing this in a mutual fund.
Why wouldn't you at least consider doing very similar things in,
in an ETF rapper? And, you know, the,
the SCC hadn't allowed actively managed ETFs at the time,
and so we, we kind of got a little bit creative and,
and basically made indexes more like active
management. We just said, Well, if,
if an ETF is only allowed to replicate an index,
well then why wouldn't you just make the index, you know, have,
have a little different goal for the index,
and that's to try to outperform the market or to, to manage a risk or to,
uh, you know, maybe, um, mitigate, you know,
single stock exposure that are, that's found in some indices that,
that type of thing. So, um, so we really sought to redefine what a,
what an index was so that we could replicate, um, you know,
not just pure beta indexes, but indexes that try to achieve something.
Um, so yeah, it was a fun ride and, uh, it was,
it was fun to educate people on what an ETF is, what it does. And,
um, yeah, so it's, uh, it's a very different world today,
much more crowded space, and, uh, as you know,
everything under the sun seems like it's been done, but, um, you know,
creative people think of more ideas all the time. So, um, so yeah,
that's a little bit of the background of, of Power Shares.
And then how was it that you came to co-found Innovator ETFs?
Yeah, well, uh, you know, Bruce Bond and, and I had started Power Shares, like,
you know, like you said, back in 2003. And, uh, you know, the,
the running joke in the office is that after we sold Power Shares, uh,
Bruce's wife wanted him out of the house. And so we added a, you know,
had something for him to do. But, um, we, you know, the, the,
the more serious answer is that, um, you know, I was, well, actually,
I was pitched an insurance product that had like a structured note
embedded in it. So in other words, if it,
the insurance product allowed you as like a,
basically a universal or a whole life policy that allowed you to invest the
assets of the insurance policy in the market,
but it also had downside protection as well. And so,
um, it's basically like a crediting strategy in an et in a, I'm sorry, in a,
in a life insurance rapper. And, and I, you know, at the time I didn't really,
I've never looked at an annuity or, or structured note myself.
And so I didn't have a, a ton of interest,
but the insurance rapper got me somewhat interested.
And so I'd say similar to Power Shares, you know, the,
the question was like, Well, you know, maybe we shouldn't,
maybe this shouldn't be done in a mutual fund wrapper.
Maybe it should be done in an ETF wrapper. And so a lot of the, the,
the products that the insurance and banks provide, you know, the,
the question is, why hasn't that been done in an ETFs and,
and could it be done in an etf? And so, um, so it was,
it was a steep learning curve for me and for, for all of us,
just cuz I didn't have a ton of derivatives experience and,
and structured node and annuity experience. And, um, but, but that's what we,
that's what we set out to do, is to, um,
to bring a lot of the products that are,
that are offered by insurance company and,
and banks and put them in the ETF wrapper. Um, you know, my,
uh, my youngest daughter, I have four daughters,
and my youngest started working at Chick-fil-A when she was 14 years old. And,
um, you know, I, I thought they had child,
child labor laws to prevent that kind of thing, but I was proud of her,
of course, and she worked there for, for many years. And, um, still to this day,
her favorite restaurant is Chick-fil-A, which is, you know, ,
usually when you work at a fast food restaurant,
you never want to eat there again, but sh she still loves it. So it's,
it's the same thing, uh, it's the same idea concept or the,
the more I've done ETFs and now I've done it for most of my career,
the more I appreciate the, the, the chassis or the,
the vehicle itself and, and what it provides. And so, you know,
when compared to a, an insurance product or a structured node, um, you know,
what, what we've done is we've, we've created liquidity, you know,
in the product. Uh, many insurance products and, and bank issue products are,
are highly illiquid. And, um, you know,
so we've added the intra day liquidity of an etf. We've,
we've added transparency. Um, and then the, and then the tax piece,
which I touched on before, um, which I really can't state enough, is,
is what we bring to bear. And, you know, and the other thing too is you,
you remove the counterparty risk or the credit risk associated with the,
the issuer of a, of a structured note.
And so that's why we were pretty excited to,
to figure out if it could be done in an etf. And, you know,
the FCC was like scratching their head, like, What are you guys trying to do?
And, uh, so it took a little while and, uh, but we were glad we,
we took the effort and, and, and took the time to, to figure it out and get it,
get it, uh, approved, uh, and, and out into the marketplace.
All right.
So the bread and butter of your ETF lineup is obviously the defined outcome
ETFs. And I've covered these quite a bit on the podcast,
but we do always have new listeners joining us. So I,
I thought it'd be good to have you just explain how these work and any other
nuances. And I'll, I'll give you a specific series as an example.
So let's use the October series on the s and p 500,
since these will be resetting soon. Mm-hmm. and I'll,
I'll just know there's the US Equity Buffer etf, ticker B O C T,
there's the US Equity Power Buffer etf, P O C T,
and then the, uh, US Equity Ultra Buffer etf, ticker U O C T.
Just walk us through the basic design of these and, and,
and how these work for somebody who is unfamiliar with them.
Yeah. At, you know, at, at the highest level you can take it, it's,
it's really straightforward. It's, it's for the person that says, You know what?
I, I do wanna stay invested in the market. I know that's the right thing to do.
I should, I should own stocks. And,
but I'd also like to maybe have some downside
buffer or protection or, um,
some type of risk management on the downside,
if the market does go down and I'm,
I'm willing to give up something for that, which is the upside,
some of the upside. And so many of our products, or most of them,
I would say the vast majority have have caps.
And so it's for the person that says, You know, what,
if I could stay invested in the s and p 500 etf,
but have a 15% buffer, so if the market goes down,
uh, 15% or less, the,
the fund will not go down at all over a one year period.
Most of our products are, they have these, uh, what we call annual resets where,
uh, they, they don't expire, but they, they just reset every year. So if you're,
if today, October, 2000 and, or almost October, 2022,
if you're saying a year from now, I, I wanna stay invested in the s p 500,
but I also, if I could buffer the first 15% of losses,
um, I'd be willing to, to cap my upside, um,
to, to obtain that. So like for instance, for the, for the, the,
so we have different buffer levels as well. We have nine, 15, 30%.
So for a 15% buffer, that means you're protected for the first 15%,
and then you participate in losses. You, you're,
you're willing to cap your exposure to the s and p 500 at
18%, or, or are the estimated caps for, for, uh, October one.
So, um, so if you're, if your mindset is like, Well, I'm happy with,
if I could get 18% return on the market, that would be great.
And, and I'm also willing to, uh,
but for the benefit of being cap myself at 18%,
I also get a 15% buffer. So, um, you know,
on a 9% buffer, so you're only, you've protected for that first 9%,
and then you have exposure to the market. There's currently,
there'll be a 26% cap roughly, um,
for the October reset here. So, um, so yeah, again,
really high level it's, I, I, I wanna stay, invest in the market.
I know it's the right thing to do, but, um, you know, I'm,
I'm nervous and so I'd, I'd want some type of, um,
downside buffer built in,
and I'm willing to cap my upside over a one year period for that. And I think,
you know, I think, I think investors like the clarity of it all, like, you know,
like, oh, a year from now, like, you know, you're, you can kind of not,
not make a bet, but make a, uh,
express your opinion on what you think the market could do. You know, if you're,
if you're saying, Well, yeah, I think,
I think the market being down between zero and 15% is a, is a real possibility,
then, then you can buy our power buffer product.
Or if you think the market could be down 25% or 30%,
then we have an ultra buffer that that protects for the first 30%. So, uh,
so it's a way for you to, in effect, like tailor returns to what,
uh, to meet your investment risk and your, your, you know,
your profile of what you wanna achieve in your portfolio. So.
Yeah, I thought that was a high level. Yeah, no,
I thought that was a good description.
If I could just sort of restate what you walked through.
So investors can buy the upcoming, uh,
October US Equity Power Buffer etf, and if they buy that on day one,
and we can talk a little bit more about that,
they're protected from the first 15% down move in the s and p 500.
If the s and p 500 goes up, they're gonna capture that up to a cap,
which I believe you said was a little over 15%. And I'll,
I'll add that there are no dividends here.
I think we should mention that the fees, as I look at your ETF line,
many of these are around, excuse me, 79 basis points.
And I'll also note that in terms of the exposure itself that's
being gained through what are called flex options or flexible exchange
options, um, is all that correct? Anything you would add to that?
Yeah, I didn't, I, Yeah, thanks Nate.
I didn't really get under the hood as much, but you're, you're exactly right.
How do we do that? We, we, we buy, um, it's,
it's through a portfolio of, of flex options, uh, that you mentioned. And so,
um, and it's pretty straightforward. It's a static portfolio of options that,
um, basically you, you buy a, a deep in the money call on on S P Y,
which is the s and p 500 etf. Uh,
so when you buy a deep in the money call on on S P Y,
that gives you one to one, uh,
tracking of the market. And so that's how we achieve that.
And then we also, um, basically, um,
we buy a put spread so that that enables, you know,
for the 15% buffer that that limits, uh,
downside for that first 15%. So we're, so we,
we buy that call option that deepen the money, call on, on the spider,
and then we, we, we buy these, the put option to,
to provide that protection from zero to 15%.
That option package costs more than money that we
have. And so if it's, you know, if you have a hundred dollars to spend,
that would cost you about $106. So,
so we have to sell a call option, uh, to finance that,
and that's what, that's what sets the cap. So I said on the 15% buffer,
the the caps are looking like they'll be about 18%.
And so that's what selling that call option is what capture performance.
So you only participate up to that, up to that cap. And, and like,
like you mentioned, it's, it's generally over a one year period. And then,
you know, once you over the, after the, the options expire a year later,
nothing happens as far as, you know, you don't have to sell the etf,
you can just hold onto it. And then a new options package is put in place with,
with new caps and, um, that type of thing. And all that happens in a, you know,
tax efficient manner. Uh,
you shouldn't expect any capital game distributions in the product.
John, uh, just a few minutes left here.
I keep mentioning the point to point aspect of these products. I,
I always like to emphasize this, when, when covering to defined outcome ETFs.
Uh, I, I just think it's important for investors to understand this,
and I wanna reiterate that the initial upside cap and downside buffer,
those only apply if an investor buys these products on day one.
Otherwise, obviously with, uh, moves up and down in the markets,
that upside cap and downside buffer will move as well. Um,
is there anything that you would add to that?
I know innovator has built some great tools on the website,
so if somebody wants to go and look at a particular ETF and see the remaining
cap or, or buffer that's all out there. Anything else you would add?
Yeah, I, you know, the, the,
I think the defined nature of these products is really what helps sell them.
You know, candidly, I think people like to like, make that determination, Oh,
a year from now I think, you know, x, y or Z is gonna happen. And so,
um, so yeah, you're exactly right. It's, it's defined. And, um, you know, the,
the way I always describe it is when you buy a bond, um,
the coupon doesn't change,
but what you pay for that coupon changes based on rates and,
and, you know, other factors, it's the same thing here. You, you,
you know what you're gonna get at the end of the outcome period, but,
but what you pay for that changes. And so it's, it's,
it's very much just as defined the first day of the outcome period as it is six
months into the outcome period, you, it's, it's not, not really any different.
You're, you're just kind of getting a, a, a stamp in time, but if,
if you were to buy 1, 6, 3 months into the outcome period, it's the same thing.
You know,
it's just a different price and you know exactly where you're gonna end up. Uh,
and so you're just paying something different for that amount. Um, so,
and you know, we, to your point, we,
we thought people would generally just buy them near or end at the end of the
outcome periods, but, um, we've really found people doing, you know,
a lot of different things, trading them in between. And, um, you know, so you,
you, you have the flexibility. We've, we've kind of created a,
a secondary market, if you will, for a, a structured note outcome, you.
Know? Yeah. And I should note the defined outcome products you offer,
they span not only the s and p 500, uh, but also small caps,
the nasdaq, you have a developed, uh,
international and emerging market equity products, and even a,
a long term US treasury products. Uh, but before I let you go,
I have to ask you about the most recent product,
which is this new hedge Tesla strategy etf,
tsl H uh, as I'm sure you're aware, the, uh,
introduction of single stock ETFs is probably one of the biggest ETF stories of
2022. I, I think it might end up at the top of the list in your etf.
This offers exposure to the price of Tesla up to a cap,
and then it actually has a max loss, so a floor of 10% each quarter,
not including fees. Just briefly tell us about this one. Why Tesla and how,
how are you getting this exposure?
Yeah, yeah. So like, it's, it's again, pretty straightforward.
This one's unique in that it's actually a floor product.
So most of ours are buffer where you, you know,
you're buffered for the first 15 or you know, 30%. This is actually,
you cannot go down more than 10%, um,
if you buy it at the beginning of the outcome period, and it's quarterly. So,
so again, yeah, it's like, like many of our products, it's,
it's for the person that says, You know what? I, I wanna own, or I, I want to,
you know, maintain exposure to Tesla, but I don't think,
think it's gonna have the, uh, you know,
strato furic returns that it has in the past, but, uh,
I want to maintain some exposure to it. And so, you know,
you're basically putting guardrails on that product and,
and basically it's very simple. It's how we do it, it's, it's, uh,
it's treasuries, and then we buy, um, you know, a call option to,
to gain you that exposure and then, uh, and sell the call option.
And that's what sell, uh, sets that cap. So very straightforward, uh,
resets every quarter. And you know, the, when we just launched it, you know,
a couple, two and a half months ago, the, the Teslas up,
I think about six or 7%. So it's underneath that cap. And so, um,
for the person that bought it when we first launched it, you know,
you've participated one to one with Tesla, and,
but you've also had a 10% floor in place. So as, so,
as long as Tesla doesn't go up more than about 10 or so
percent each quarter, then, uh, you know, you've,
you've kept pace with just owning Tesla on its own, but you've had a,
a 10% floor in place. So, um, so yeah, our, you know, the other product,
single stock products out there, I think are trying to gain you, you know,
higher beta, more exposure, uh, similar to other products, we're,
we're trying to reduce beta or reduce exposure. Um, but it's,
but still allow you to, to stay invested.
Well, John, we're gonna have to leave it there. Uh, great to finally connect.
Congratulations to you and the entire innovator team on all of the success.
Thank you for joining me.
Thanks, mate, We appreciate it.
That was John South,
co-founder and president of Innovator ETFs.
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Stop.
I'm now joined by Rich Kerner Senior ETF sales specialist at Touchstone
Investments, who back in July, just a couple of months ago,
they entered the ETF space with a launch of the Touchstone Strategic
Opportunities etf, ticker sio.
They quickly followed that up with a launch of three additional ETFs,
which we'll get into.
So four ETFs and all already nearly 200 million in assets,
by the way. And, uh, Rich is now on the line with me. Rich,
welcome to the podcast.
Nate. Thanks for having me. Excited to be here.
All right. So as I usually like to do,
let's start with a little background because I'm guessing some of our listeners
are, uh, unfamiliar with Touchstone Investments.
Just give us a quick snapshot of who you are and why you decided to get involved
with ETFs.
Sure, no thanks. Uh, so Touchstone Investments has been around since 1994.
We've got about 25 billion in assets under management with the addition,
as you just mentioned, of our four ETFs. We now have 36, um,
mutual funds and ETFs. Um, our model is, uh,
we think unique. Uh, we work exclusively with institutional sub-advisors. Uh,
we currently partner with 14 different sub-advisors to manage those 36 funds and
ETFs, Uh, a little bit, uh,
almost half of those that are eligible for a track record,
13 of 'em are four and five star funds. Um, and so I,
I think it's a great story that sometimes folks, you know, haven't heard. Uh,
we are, uh, owned by Western and Southern, uh, which is a Fortune 400, uh,
mutual life insurance company, um, headquartered in, in Cincinnati as well,
that's been around since 1888. So, uh, we've got a very strong parent, um,
that's really committed to the ETF business and being invested
in the ETF business. And so the reason we got into ETFs is we've,
you know, just like everyone else, we've seen this, you know, incredible flows,
uh, into the ETFs. Uh,
we know from an asset management distribution standpoint,
we want to have not only mutual funds, but also ETFs for our clients, uh,
to use. And,
and certainly we're excited to bring our unique brand of active management
distinctively active, uh, to the ETF wrapper.
Your collaboration with subadvisors definitely jumped off the page at
me as I was looking at, at Touchstone. Uh, why do you like that model?
I know the goal here is to partner with best in class managers to sub advice
funds. What do you see as the value of doing that?
Well, it's, it's the way we've always done it. So when we started in 1994, um,
one of our first partners was Westfield Capital Management,
still one of our partners today. We just really believe that it's,
it's hard for one asset manager to be the very best in
all the categories.
It's hard to be a great large cap value manager and also a great large cab
growth manager. And then, by the way,
what about small and mid-caps and then international and, you know, the,
the list goes on and on. So when you're partnering with, um, you know,
best in class institutional money managers who really have demonstrated long
term success in implementing truly active strategies, um,
we think it's a, it's a great model,
and oftentimes advisors and investors aren't able to typically access,
uh, a lot of these institutional money managers. So, again,
hard to be great in every asset class. And, and we think this model, uh, really,
really works well to, to give you a competitive lineup across all asset classes.
Okay. So I noted at the top the Touchstone Strategic Opportunities etf, ticker,
s I o. Let me tee up the other three products here.
So there's the Touchstone Dividend, Select etf, ticker DV and D,
the Touchstone US large Cap focused etf, ticker lcf, and then the,
uh, Touchstone Ultra Short Income etf, ticker T si.
And certainly feel free to delve into any of these in detail,
but I'd love to hear more about why these particular strategies coming out of
the gate, why these four ETFs?
Sure. No, uh, great question. Um, all four of these products, uh,
are managed by Fort Washington Investment Advisors,
which is also a subsidiary of Western and Southern, Um, Fort Washington, uh,
manages approximately 80 billion, has been around since 1990.
And I think most important for us, um,
I tell advisors and clients all the time,
when you're in Cincinnati and you're on the Touchstone Investments,
we're on the 11th floor,
Fort Washington Investment Advisors is on the 12th floor.
So not only do they have a great long term track record in each of these
asset classes, but when you're launching your first ETFs, it's great to have,
uh, you know, the connectivity with the folks, you know, right upstairs.
So that's the reason we went with Fort Washington Investment Advisors to, uh,
to launch our first products.
And do you wanna pick an ETF or two to maybe delve into in a bit more detail
just to give us there an idea in terms of how you're approaching a particular
market?
Yeah, sure. So again, all of our strategies are, um,
distinctively active. And, and so I, I'd love to just spend a, you know,
a minute on,
on distinctively active and then just kind of talk about the equity and fixed
income, uh, ETFs, uh, that, that we offer.
So folks often ask me, you know, what is distinctively active? And, you know,
in its simplest form,
active means not passive or not cab weighted indexing.
And our distinctively active strategies are those that we've found have a
historical track record of generating alpha and a high active share.
And when I think, you know, when I talk to advisors, uh, and their clients,
I think there's a little bit more of a,
of an acceptance for active fixed income as a, as an asset class, being able to,
uh, deliver alpha. But, uh,
we also think you can find really good active managers on, on the equity side,
um, and a lot of equity strategies. I know, um, I think it was on last week's,
uh, podcast, you were, you were talking about the spiva results. You know,
a lot of times when you start eliminating closet indexers or you eliminate,
you know, large, you know, bloating, what we call bloating, you know, high aum,
that eliminates a portfolio manager's ability to invest in the entire universe
or, you know, just dilution with a lot of, you know names.
When you start eliminating some of those, uh, characteristics from the active,
um, manager universe, especially on the equity side, you then start to see that,
you know, there is a really good track record, uh, for active, uh, managers.
And so on the equity side, we launched two ETFs, as you mentioned.
One is large cap focus. Um, this is, uh, what I would, you know,
simply say is a kind of a moat, uh, investment strategy.
We're looking to build a portfolio, uh,
that's made up of businesses that have high sustainable barriers to entry with
also high returns on capital.
And to buy these businesses at a discount to their intrinsic value, um, and,
and kind of own those names for, for a long period of time.
And we think that's a, a great way to diversify investors holdings,
especially in that large cap space where so many folks tend to just, you know,
go to, uh, go to an index on the, uh, dividend side. We're, uh,
we're excited not only by the ticker DV n d, uh, which uh,
we were excited to see was, was available and out there, but, and act,
there's not many actively managed, uh, dividend strategies.
And so what this strategy does,
it's actually sector neutral to the s and p 500.
So it doesn't take on some of the traditional dividend ETF biases that can
be, you know,
overweight to utilities and staples and healthcare and some of the other
defensive names. And then, you know,
as folks have probably seen this year when you're, again,
when you're sector neutral, you're not subject to, you know, perhaps a day like,
you know, last week in the market where certain sectors energy are,
are really under, uh, under pressure because of the price of oil. So, you know,
growing dividends, having, having a product where you can, you know,
exceed the s and p 500, but not sacrificing, uh, you know,
broad capital market exposure by diving into just, you know,
one or two, you know, sectors. For big overweights, we think is a,
is a great way to get, uh, dividend exposure, especially, uh,
in this environment. So, uh, tho, tho that's the story on the,
on the equity side. Over on the fixed income side, we've got two products.
The ultra short income, probably where we're spending most of our conversations,
because I think folks right now are looking for more income.
They're looking to shorten up duration. Uh, we think this is a,
this is a great strategy, uh, for folks to take a look at.
It always has a duration of less than one year, currently, um,
about 0.6 right now,
and we think this fits really well for what we call inside out, uh, investing.
Uh, so, you know,
these are cash investors who might wanna hire yield than what they're currently
getting inside their money market fund.
So they're willing to take on a little bit more risk.
And then the sort of the outside in is folks who are looking at their core bond
exposure this year, looking at, uh,
some negative returns in that area and thinking, Okay,
I wanna shorten up duration, but I don't wanna give up income.
I don't wanna give up, uh, my total return. This is a strategy that, uh,
when you go back and look at it over time,
has actually been able to deliver about 80% of the Barclays Ag with about
20% of the risk. So really fits interestingly in this environment.
And then finally, the first one we launched Strategic Income Opportunity.
S i is really our best idea of fixed income portfolio from Fort Washington.
I, I would put it in the multi-sector bond category,
or the core plus plus category. So, um, you know,
up to 50% can be in non-investment grade.
It does have very specific guidelines on how much high yield or how much
emerging market debt. Uh, it can, it can own, You know,
Fort Washington manages a little bit over, uh, 50 billion in, in fixed income.
So really a strength, uh, with Fort Washington investment advisors.
Rich, just a couple of minutes left.
You mentioned the speed of scorecard that I covered last week. You,
you were trying to get ahead of me here.
You probably knew I was gonna bring this topic up, but I, I do want to ask you,
and I know this is a little bit of a, uh,
cliche question around active management, but look, I,
I know you're well aware of all the data that's out there showing how difficult
it is for active managers to consistently generate outperformance. And,
and you alluded to this earlier, I mean, I look at, uh, DV and D and lcf.
One thing that is clear on both of those, these are much higher active share,
higher convict, uh, conviction strategies, d,
db and D that can hold between 40 and 55 companies, uh,
lcf between 25 and 45.
So I think that gives listeners a really good feel that these aren't closet
index funds, but, but is that really where the difference comes in?
So if you have, you know, first Washington as a subadvisor,
these are higher conviction strategies.
Is that what you think differentiates you from the market and gives you a shot
at generating out performance longer term? Because again, the,
the data we've all seen it, it is difficult to, to,
to generate out performance consistently over long periods of time.
No, no. I, I, I think this is, I think this is the environment where folks are,
uh, you know, expanding their opportunity set or product set to look, you know,
all across, um, and looking at, you know, more, you know, active,
uh, ETFs. In fact, I mean, you look at the first half of this year, um, yes,
still dominated, uh, on the equity side, still dominated by, you know,
plain vanilla, uh, ETFs. But you're starting to see, you know, active,
uh, ETFs gathering almost 15% of flows, uh,
you know, through the first half of the year. So I think folks are looking for,
you know, high active share, high conviction strategies, um,
that they can use to, again,
either compliment a little bit to what they're doing on the, you know,
on the passive side, uh, but really, you know,
look for that demonstrated ability to outperform or protect a little bit more on
the downside, especially with the volatility, uh, that we've seen this year.
Rich, before I let you go, uh, what's next for Touchstone etf?
Should we expect more launches anytime soon? Obviously, you know, these four,
you're off to a great start. Uh, just in terms of, you know,
you look at the assets and these products, what, what should we, uh,
expect moving forward?
Well, listen, we're really excited to be, uh, in the ETF space.
We're excited about these first four products. Uh, and we are talking to all of,
uh, those subadvisors that I mentioned about our ETF initiative.
There's a lot of excitement, uh, you know, from the subadvisors,
but we're also looking at our entire product lineup and seeing where we do have
gaps, um, and thinking about perhaps when we launch a new product,
uh,
whether it be in some of the categories that we've seen growth this year or over
the past couple years, like thematic, uh,
we're looking not only at the mutual fund wrapper, but also the, uh,
the ETF wrapper. So, um, a lot of exciting things, uh,
and I think you'll hear more from us, um, you know,
later this year or into 2023.
Well, Rich, greatly enjoy the conversation.
Certainly wish you the best of luck with the ETF lineup.
Thank you for joining me this week.
Thanks Nate. Appreciate being on.
That was Rich Kerner Senior ETF sales Specialists at Touchstone Investments.
That'll do it for this week's ETF Prime. I wanna thank one of our sponsors,
Capital Group. If you would like to learn more about Capital Groups ETFs,
you can visit capital group.com/etfs.
Next week. All be joined by Matt Piro,
who is Vanguard's global head of ESG product.
We're gonna look at their ESG ETF lineup and discuss the, uh,
broader ESG landscape. I think everyone knows always one of my favorite topics,
so certainly, uh, join me for that. Until then, have a great week.