ActiveETFs | InFocus spoke with Paul Hrabal, who is the President and Chief Investment Officer of U.S. One. U.S. One launched its first actively-managed ETF One Fund (NYSEARCA:ONEF) in May 2010, which strives to provide investors with low cost, passive exposure to globally diversified equities. Paul speaks with us about the investor response for ONEF, the logic behind ONEF’s holdings and future plans for more products.
Shishir Nigam – ActiveETFs | InFocus: How has the investor response to ONEF been so far?
Paul Hrabal – President, CIO, U.S. One: I think it’s been very positive from both the investor standpoint and from financial advisors. I think we’ve hit our market segments pretty effectively, in terms of communicating what the product is and finding our audience. We’re coming up on the 6-month anniversary in a couple of weeks and we’ve been adding about a $1 million a month to the asset base. And in the most recent 60 days, our volumes in terms of the average number of shares traded per day has doubled or tripled over what it was in the summer time. So we’re seeing a lot of activity and we’re seeing advisors start to get some traction with us and so I think it’s going well so far.
Shishir: What is the main target investor group for One Fund?
Paul: Individual, small investors with less than a $100,000 investable assets that either have limited or no financial advice. So it’s for the folks that don’t have a dedicated financial advisor. We’re trying to fill the gap there a bit with those folks and delivering for them a professionally constructed stock portfolio in one fund, very similar to what an advisor would do for a wealthier investor.
Shishir: What are the main qualities of the fund that appeal to investors?
Paul: Clearly, all-in-one, done for them and global diversification. I think the fact that our fund covers 95% of the world’s stock markets at 51 basis points, where they don’t have to touch anything, they don’t have to rebalance, they don’t have to figure what sectors to invest in and what weightings, I think is a great relief for a lot of the small investors that are otherwise left to their own devices. I think those are the key selling points.
Shishir: But do you think investors to some extent actually like complexity and like to be constantly involved in their investments?
Paul: I think there is an active trader, active investor segment. Probably, if I had to guess, 10-20% of individual investors fall into that category where they would rather do it themselves. Many of the folks, for example, on Motley Fool or Seeking Alpha have commented on our fund to the extent that the investment approach is great, the portfolio construction is good, the costs are in line but we can do it ourselves and we don’t have to pay you 35 basis points as a management fee. So for that group, that 10-25% of the folks, clearly they’d rather do it themselves and that’s great. Some people like to change their own oil on their car, but most people want to spend – I’m just talking the average individual guy with $25,000 in his individual IRA account, 20 years to retirement – he wants to spend, I’m convinced, an hour a month on his investment portfolio. And that’s all he has time for – an hour a month. And for those folks, they want the professional management, they want someone to do it for them, they want someone to take an active interest in managing the portfolio but they don’t have the resources to get the attention of a financial advisor who would do it for them.
Shishir: What is the reasoning and logic behind the existing weightings across the 5 ETFs in ONEF?
Paul: First of all, we approached it from the standpoint that these are US investors – Americans living, working and retiring in US dollars. We wanted to overweight the United States. We also though wanted to try to bring to the small individual investor’s attention that broadening outside the US, with some global diversification in both developed and emerging markets, can boost fund returns and reduce risk over the long run and outperform any one single market. And so we’ve constructed the portfolio to be heavily in the US, both in large and small cap, but also have about a third internationally to bring that global diversification. The other aspect of the portfolio that’s a little bit different from a pure market-cap weighted global fund would be that we over-weighted small-cap, both in the US and internationally because historically, again, we follow what the numbers point to which is over decades small-cap outperforms large-cap by about 200 basis points.
Shishir: What is your outlook for the next 2 years? Do you see these weightings in ONEF changing if economic conditions change significantly?
Paul: Well, first and foremost, we’re not a sector rotational tactical type fund. We’re taking a long-term strategic view of each of these market segments and so we do an annual rebalancing where someone can be confident that we, of course, are paying attention to what’s happening in the global economy and shifting our weightings over time. But as we’ve told both individuals and advisors, we are going to be very predictable in our portfolio allocation. You’re not going to see us shift from two-thirds US to one-third US in a year. You’re not going to see us make those fundamental moves. But over time, if we see certain markets outperforming and if we believe that those will continue to in the future, we are going to make subtle changes in shifting the portfolio over time.
Shishir: Is there some sort of a range within which the manager would deviate from the existing weighting for each underlying?
Paul: Ya, 5% band. So we’re not going to be shifting any one segment – there’s 5 segments in total – we wouldn’t shift any one segment over 5% from one year to the next. One of the things we are looking at is emerging markets. We currently have 5% in local companies in emerging markets and then we believe that our global multinational exposure gives us another 5% in emerging markets for a total of 10%. And of course we continue to look at that both from the aspect of which emerging markets – the overall weighting, but also at some point since we track MSCI indices in our holdings, as those indices change and the character of what their emerging market index looks like, we may be making some changes on our end as well.
Shishir: The asset allocation within the fund is only revised once a year, so why can’t investors just purchase the 5 underlying ETFs themselves and hold them?
Paul: Ya, absolutely. They could and, in fact, for those that would rather do it themselves, I would strongly encourage them to go to our site and look at our holdings and read our methodology and follow us and make their own trades and build that same portfolio. But for the 80% of investors who don’t want to do that, either because they don’t have the time or inclination to do it, they would rather just buy our fund and have us do it for them. Especially from a cost standpoint, it’s actually more cost efficient, even though you’re paying us the 35 basis points. If you think about it, if you have 5 ETFs and you’re going to rebalance it and you’re going to put in new money maybe 4 times a year, to make those incremental trades for 5 different ETFs, depending on where your brokerage account is, could end up being much more costly than paying us the 35 basis points. Consider a $10,000 investor, they’re going to pay us $35 a year extra to do it for them versus doing it themselves. In most people’s view, that’s not going to be enough of a cost that they’re going to want to do it themselves.
Shishir: You have announced plans for two new actively-managed ETFs, one of which will be bond-focused, and the other balanced. Tell us more about these.
Paul: Well, they’re not in registration yet, they’re still on the drawing board. We want to make sure that we’ve got our first fund off to a successful launch. Probably at the 1-year mark, we’d want to kick off additional funds. And generally, it’s going to follow the exact same principals of One Fund, which is a globally diversified portfolio in a single fund at a low cost that follows a passive index-based approach. So we’ll do the same thing with the bond universe that we’ve done with the stock universe. And then the balanced fund is going to be a combination of the stock and the bond in various weightings. So that, again, someone can just buy that one fund and be done. And that’s our tagline at this point, one ETF and you’re done. And that’s resonated very well with both individual investors and advisors. Advisors are always faced with the challenge of having a client that has a number of smaller low balance accounts that they have to deal with. And our fund, our product, has given them an ability to diversify at a low cost for those smaller accounts, without having to spend the time and money to build out a complete portfolio for those client accounts.
Shishir: That’s fantastic. Thanks a lot for joining us Paul and we wish you all the best.
Paul: Thank you very much.
Disclosure: No positions in above-mentioned names.
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