Over the past few months, I've had the opportunity to speak with some talented ETF portfolio managers. Earlier this year, I had conversations with Global X's Director of Research Jay Jacobs and S&P 500 Equal Weight Fund (MUTF:INDEX) Manager Michael Willis. Today, my conversation is with REX Shares Founder and CEO Greg King.
King launched REX Shares in 2014 following successful stints with Barclays, Credit Suisse (NYSE:CS) and Global X. He also founded VelocityShares in 2009 which has since been acquired by Janus Capital (NYSE:JNS) in 2014. REX launched its first ETFs earlier this year and now manages four in total - the REX Gold Hedged S&P 500 ETF (NYSEARCA:GHS), the REX Gold Hedged FTSE Emerging Markets ETF (NYSEARCA:GHE), the REX VolMAXX Long VIX Weekly Futures Strategy ETF (NYSEMKT:VMAX) and the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (NYSEMKT:VMIN).
In our conversation, we discuss the company's gold hedged strategies but also cover the Fed, the dollar and what to expect for the remainder of 2016. My personal thanks go out to Greg for taking some time out of his busy schedule to offer up his thoughts.
(Dierking): To start out with, can you tell me a little bit about Rex Funds and some of the products the company offers?
(G. King): The idea behind REX Shares is to create an ETF company with a focus on building products that take existing market exposures and make them more efficient, more effective, or both. We want to use our team's collective expertise to deliver thoughtful solutions that solve specific constraint-based needs in investor portfolios.
(Dierking): You recently launched two new funds - the REX Gold Hedged S&P 500 ETF and the REX Gold Hedged FTSE Emerging Markets ETF. Can you explain how these portfolios are constructed?
(G. King): The general construct is the same in both cases. We first create a portfolio that holds underlying securities contained in an equity index such as the S&P 500 or the FTSE Emerging Index, or low-fee ETFs tracking such equity index. We then take additional long exposure to the price of gold through a futures position. We may also use a modest equity futures position to ensure 100% exposure to the equity component, since some cash must be posted as collateral for the gold and equity futures. The innovation here is that the equity position supports the gold position, thereby giving the owner 100 percent exposure to both equities and gold.
(Dierking): What are some reasons investors consider a gold hedged index fund product over a traditional index fund?
(G. King): We see three types of investor interest: First, capital conservationists who don't want to sell their stock positions to gain gold exposure. Second, gold investors who like the idea of plugging in equity exposure underneath their gold position. And third, equity investors who like the idea of putting a safe haven-type hedge around a portion of their equity portfolio.
(Dierking): Why did you choose a gold hedging strategy over another theme?
(G. King): Wealth preservation is one of the core themes we think about when creating new ETFs. Whether they are designed as long-term strategic holdings or more as portfolio tools, the idea is to enable investors to preserve and enhance their wealth and purchasing power.
(Dierking): The UBS E-TRACS S&P 500 Gold Hedged ETN (NYSEARCA:SPGH) is a similar fund with a similar strategy. How would you say your fund compares and contrasts with that fund?
(G. King): An exchange traded note (ETN) is a product that is issued by a bank. In an ETN, investors are holding a contract that bears credit risk to the issuer. REX's gold hedged solutions are exchange-traded funds (ETFs). In an ETF, investors avoid the bank's credit risk. There is also a significant fee difference in that our net fee is 0.48% whereas theirs is 0.85%. As with any products, there are a number of other distinctions between the ETNs and the REX ETFs, and potential investors should review the offering documents of both products carefully to determine if any of these distinctions are material to their views on the products.
(Dierking): The strong dollar has impacted the financial results of many domestic companies. Do you see the strength in the dollar continuing and what kind of impact could that have on the economy?
(G. King): The dollar has recently begun to show some weakness vs. foreign currencies. If this continues, it should begin to flow through to corporate balance sheets and help domestic companies. That being said, the trend could easily reverse toward dollar strength especially if the Federal Reserve Bank raises rates.
(Dierking): Janet Yellen has continued to indicate that the Fed will take a cautious approach to future interest rate hikes. Do you think we'll see another Fed rate hike before the end of the year and how will the market react?
(G. King): With futures markets increasingly indicating that there will not be another hike in 2016, I would be surprised if the Fed took such action. If there is a rate hike, the equity markets could react negatively similar to what we saw at the beginning of the year.
(Dierking): Finally, what are some themes that investors should be paying attention to for the remainder of 2016 and beyond?
(G. King): REX is focused on wealth preservation and enhancement. Investors need to think about their portfolios in terms of managing downside risk. As we all know, it takes a 100% gain to recover from a 50% loss, so managing downside is key. While this is always true, in 2016 it is especially relevant given we are in the 7th year of a bull market in equities. At this point, hedging for a downturn should be top of mind.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.