ETF Prime: Tom Hendrickson on the Growing Popularity of Alternatives

On 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. Later Geraci was joined by Giang Bui, head of U.S. exchange traded products at Nasdaq, to discuss ETF trends in 2022 and a look towards 2023. Finally, Kristof Gleich, president and CIO of Harbor Capital Advisors, was on to chat about Harbor’s investment approach to ETFs and highlight their funds.

Prolonged market volatility in 2022 has given rise to an environment in which many alternative strategies that struggled previously are now performing strongly. Alternatives aren’t just a vanilla strategy though, often using complex components and approaches that require a solid understanding of what exactly is under the hood before investing, cautioned Hendrickson.

The 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 uptick in research in this area,” Hendrickson explained. The inherent complexity of alternatives has long proven a barrier for advisors, creating a sort of “black box” around alts that VettaFi is working to deconstruct through offerings such as livecasts, webcasts, and research.

Alternatives Shine In the Eyes of Advisors

Geraci pointed out that it’s the unique nature of ETFs and their ability to “democratize investing” that unlocked alternatives strategies that had previously only been available through hedge funds or to institutional investors, driving a wave of interest and research into alts ETFs.

Hendrickson collated data on advisor interest in alternatives beginning in the fourth quarter of 2020 as a baseline and moving forward through now on advisor research into alts on the VettaFi platform. “What I saw was an extremely discernible trend,” he explained, detailing flat interest over the course of 2021 compared to 2020 and then a 30% increase in interest in Q1 2022, 60% increase in Q2, 62% increase in Q3, and 70% so far in Q4 (all compared to Q4 2020).

Managed Futures Soar in 2022

Alts ETFs that have seen enormous engagement on VettaFi’s platform in 2022 are managed futures, which take long and short positions in the futures market on a variety of asset classes.

Top ETFs include the iMGP DBi Managed Futures Strategy ETF (DBMF) which has crossed the  $1 billion AUM threshold in 2022 after beginning the year with just $60 million, as well as the KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) that has seen strong inflows this year. Other managed futures ETFs that have seen inflows in 2022 include the Simplify Managed Futures Strategy ETF (CTA) and the First Trust Managed Futures Strategy Fund (FMF).

Managed futures, and alts in general, can provide strong value and diversification opportunities for portfolios and have been extremely attractive this year, outperforming when bonds and stocks have both struggled. Because they are complex strategies, however, advisors have due diligence to understand how each individual strategy works before incorporating it into a client’s portfolio.

Top ETF Takeaways for 2022

The sustained growth and popularity of ETFs and ETPs have meant that Nasdaq has tripled its ETP team in the last year as well as adding over 100 new or transferred ETPs to the Nasdaq exchange and 20 new issuers listed with Nasdaq. Nasdaq has also worked to improve ETF trading this year as well, fine-tuning its auction collars and adding investor protections, as well as increasing investor education.

Giang Bui, head of U.S. exchange traded products at Nasdaq, explained that the growth of the ETF industry itself was a noteworthy one for 2022, with more than 3,000 ETPs listed on exchanges for the first time, having grown from 2,000 listed in just five years. “ETF inflows are still very strong: we’re at about $570 billion inflows this year so we’re on track to be our second best year, ever.” 2021 takes first place at $933.5 billion in inflows into ETFs.

It’s a strong counterpoint to the $790 billion in outflows from mutual funds and showcases the growing preference for the ETF wrapper.

Another point of interest was crypto volatility but specifically crypto futures ETFs and their ability to perform as intended amidst pronounced volatility and massive volumes post-FTX collapse, tracking the prices with tight spreads and high liquidity. It “really enforces the story that ETFs are resilient; they become a vehicle for liquidity during times of stress,” Bui said.

Looking ahead, Bui believes that conversions from mutual fund strategies into the ETF wrapper will continue to be a big trend, large regulatory proposals within the equity markets will be introduced and continued flows into ETFs even if a recession occurs.

Harbor Capital Enters ETF Industry In Big Way

Harbor Capital Advisors launched its first ETF at the end of last year and now has 11 ETFs it has brought to market, eight of those launched this year. Kristof Gleich, president and CIO at Harbor Capital, explained the established background of the firm over the last 35 years and its move from catering mostly to institutional investors to making its strategies readily available through ETFs.

“We believe that ETFs are both the present and the future of investing and carry 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 firm in 2021. Harbor Capital believes that to constantly generate high risk-adjusted returns, investors need to continually innovate. SIHY and SIFI both take scientific, thematic approaches to fixed income investing and use systematic, quantitative-driven strategies, an uncommon approach within fixed income.

The Harbor All-Weather Inflation Focus ETF (HGER) uses commodities to hedge against inflation, dynamically adjusting its commodity exposures depending on what stage of the inflation cycle markets are in. The fund is currently heavy on gold futures (currently 40% of the fund) because “some of the economic indicators are weakening. It’s likely that this environment of dollar strength that we’ve had is coming to an end and that’s all setting up quite nicely that gold relative to other commodities should do quite well.”

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