Jeff Feldman

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

Thanks, Tom. No, I have no formal training in either medicine or healthcare. I do have close to 40 years on Wall Street and I have taught macroeconomics for nearly that long. I started my career as an analyst at Goldman, Sachs and then started my own firm in the 70's. I have spent my life studying the nexus of the capital markets and the macro-economy and have devoted my business career to developing capital market tools when I think they are needed. I became sensitized to the current healthcare crisis in the US about 8 years ago and recognized that we needed to find a way to invest in the innovations that might alleviate the crisis. Thus began a journey that led me to create HealthShares. It may appear that we have burst on the scene, but this has been a long slog. The press may have have its fun calling me stupid, but I can assure all that a great deal of effort and thought went into the creation of this product.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

The expense ratio for HealthShares Therapeutic ETFs is 75 basis points. Our European Drugs ETF has a 95 basis point expense cap. Although 75 bps is higher than many other ETFs, it is roughly equivalent to the expense load of other specialized products.

WTFs, like other index funds in general, generate fewer capital gains due to low turnover of the securities in the portfolio. Generally, ETFs only sell securities to reflect changes in their benchmark index.

Investors in mutual funds may incur significant tax expense when the fund sees redemptions from shareholders. Because ETFs are exchange-traded, selling shareholders sell to other investors in the secondary market. In addition, since ETFs have a creation/redemption facility that allows actual securities, rather than cash, to be distributed to Authorized Participants, there is no realization of capital gain to be distributed to shareholders. Of course, liquidating an ETF position will generate capital gains or losses for the shareholder.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

I cannot comment about carbon credits at this time.

As to State Shares, I believe many investors will be interested in these securities.

I have a hard time understanding why investors want to put significant assets into emerging markets. Peter Lynch has always said, "invest in what you know." Investing in emerging markets is investing in what you know....nothing about. But investors are seeking to isolate asset classes.

Personally, I'd rather isolate California and invest there as opposed to Turkey or Malaysia. Maybe that's just me.

Your conjecture about state governments is correct.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

ETFs are here to stay and will be a significant asset class. Mutual funds and ETFs will co-exist. There will be ETFs of mutual funds and mutual funds of ETFs. Some mutual fund sponsors will find they can best grow their assets under management by creating ETFs.

To some extent, growth of ETFs will be a function of what happens in the stock market. I believe the biggest impediment to asset growth would be a roaring bull market. In such a scenario, greed routs fear and individuals are emboldened to buy the individual stocks that are rising the fastest. In a prolonged bear or sideways market, fear wins out and investors will seek to minimize costs which favors ETFs.

The ETF industry can be as profitable as the mutual fund business. Technology will continue to evolve and we will likely see costs decline faster than expense loads over the next several years. Of course, the wild card is what happens in the mutual fund industry. If mutual funds can become competitive with ETFs on fees and expenses, then the margins for ETFs will be squeezed.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

We agree that adding low-correlated assets to a portfolio can add the benefits of diversification and make a portfolio more efficient. The HealthShares Indexes are not highly correlated to the Large-Cap HealthCare Sector and in most cases they are not highly correlated to each other.

From 2001 through 2006, based on our back-tested results, the HealthShares Indexes had correlations between 0.46 to 0.61 with the S&P 500 HealthCare Sector (not including the HealthShares Composite Index which came in at 0.7).

For a complete analysis of the correlation of the HealthShares Indexes contact us at 800.925.2870.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

The industry needs a Bloomberg for ETFs. We need data and analytics for investors.

You are correct, this is truly a gating issue that must be addressed.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

They are equal weighted. In a $2 trillion dollar industry, progress will occur at different rates in different therapeutic areas and this will occur with different risk profiles. Hence it makes sense to engage in asset allocation and perhaps trade one against the other.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

I like the ETFs that offer investors access to strategies that are not otherwise available to them. The ProFunds series is unique and useful and I like PowerShares Water and Cleantech ETFs.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

A major part of our business is providing private labeled ETFs for other large recognizable financial institutions. In fact, the thought behind our name “XShares” is to allow our partners to substitute the “X” with their brand.

We’re one of a handful of companies in the world that has exemptive relief from the 1940 SEC Act to manufacture and distribute ETFs.

The comprehensive development process includes testing the index, lining up authorized participants, index calculation agents, custodians, administrators, market makers, filing of the prospectus and finding the appropriate national exchange for listing. We take our partner’s products step by step through the compliance requirements and assist in the development of marketing materials, websites, tear sheets, brochures and other collateral material and events to support the launch of the product.

Our value proposition to our partners is simple: to provide them with the platform to get their ETFs to market as soon as possible in an effort to capture as much market share as possible in this rapidly growing space.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

There are over 120 million people in this country with chronic disease. Most of us are close to at least one such person. It may surprise you but many of these people are quite knowledgeable about the disease that matters to them. They are familiar with the products in development and many of these people have an interest in (and have tried) investing in companies working on treatments for that particular disease.

In addition, someone who has a chronic illness might use these ETFs as a hedging strategy. A 30 year old diabetic, who expects to be treated for the next 50 years, may want to own a basket of companies working on metabolic disease (HHM), the very companies that a patient is likely to be paying for treatment. We have already seen purchasers of Long Term Care Insurance buy our Patient Care Services ETF (HHB) which owns companies that own and operate assisted living, nursing home and hospice facilities.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

A “stock picker” would not buy an ETF. In fact, a great stock picker need only select the best performing stock. Most of us are not stock pickers and biotechnology is far too difficult for most individuals to understand. Your comment about there ultimately being one winner is applicable to broad spectrum pharmaceuticals but far less true in an age of customized medicine.

Consider Dendreon, which got an FDA advisory panel last week for Provenge, a vaccine for prostate cancer. This drug (which costs $42,000 for an entire regimen) will benefit only 50,000 of the 3 million patients with prostate cancer. Yet this is potentially a $2 billion drug and with the aging baby boomers, there will be, unfortunately, many more patients in years to come. Other treatments will benefit other segments of the market. We believe there will be dozens of examples of these targeted customized medicines and there are many companies in our portfolios that are developing just such products.

So, there will be many new products which will improve therapy for all diseases in the coming years (there better be because we cannot afford to treat all patients with current products) and unless you are a brilliant investor/biologist/phy... the best way to access these opportunities in my opinion is to divide the industry into vertical segments. Now, one may develop knowledge that allows one to favor one sector over another. There may be setbacks in the development of cancer drugs at the same time there are breakthroughs in cardiology. One can then trade these portfolios against each other.

You must remember that the entire GDP of the U.S. was $2 trillion in 1977 when mutual funds first became popular. And healthcare is growing at more than 8% per year, a rate the economy has not come close to in the past 30 years. We know, looking back, that the correct way to invest in the economy over the past 30 years was using an asset allocation model to be able to rotate between sectors. The same theory applies to healthcare today.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

Exchange Traded Fund liquidity is one of the most misunderstood concepts. Generally equity securities traded on exchanges are measured by Average Daily Trading Volume for liquidity and so by extension most investors and investment professionals measure ETF liquidity by volume. Because ETFs are open –ended and can be created daily, the true test for volume in ETFs is the liquidity of the underlying basket of stocks (constituent companies) held by the fund. Generally ETFs that hold large cap stocks will have a slightly higher liquidity than funds holding mid cap securities but this is based more upon investor preferences than any real liquidity issues.

We took this concept into consideration when we developed HealthShares and based upon our analysis we do not perceive liquidity issues in these funds and the underlying stocks unless and until there is well in excess of $1 billion in assets in each fund.

The creation and redemption process takes place generally by aggregating the constituent stocks, with an appropriate program trading desk or through their internal securities lending process, and assembling the baskets that can be deposited with the ETF custodian in order to create new ETF shares. The institutional investor can obtain the position it desires and the fund can accumulate significant assets even with low ADTV of the ETF shares themselves. This is the mechanism through which many institutional investors initially enter an ETF market and may involve the establishment of an Authorized Participant Agreement with the fund distributor. ALPS distributors, Inc. are the distribution agent for the HealthShares ETFs.

Finally many of the large Authorized Participants have ETF trading desks that will assemble the baskets and create high quality block executions for institutional investors without regard to the underlying Exchange Traded Fund’s ADTV. This opportunity exists for both creation and redemption of ETFs.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

We are and intend to offer products that are not available anywhere else. Estimates abound that more than $2 trillion will flow into ETFs in the next 4 years. If that were not the case, we would not be able to compete. But this industry is still in development and there will be several more important palyers beyond the current group.

ETFs are a disruptive technology and the industry being disrupted is the $10 trillion mutual fund industry. There is more than enough for everyone.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

Different strokes for different folks. There is a broad spectrum of investor desire from very aggressive to risk free. The great news about ETFs is that we can create portfolios for any objective.

However, most ETFs are broad risk mitigated indexes. We are not addressing ourselves to investors who are capital appreciation oriented. There have been a number of articles in the press lately about how wealth polarity has reached an all-time high in the U.S. One percent of the epopulation has 20% of the wealth. And those people did not achieve their wealth by buying risk-mitigated broad diversified indexes. That's what the other 99% are buying.

Individuals should have the opportunity to participate in the private equity and venture capital and arbitrage strategies available to the wealthy.. Those who are satisified with their net worth should buy the broad indexes and preserve their wealth. But we DIVERSIFY to stay rich; we CONCENTRATE to get rich. The beauty of narrowly focused ETFs is they represent diversified concentration.

I do not believe any portfolio should be "entirely" filled with anything. My key words would be focus and flexibility.

Personally, I believe the greatest opportunity for wealth creation in the U.S. is in healthcare. I want to be substantially overweighted in HealthShares and will avail myself of funds that are replicating capital appreciation strategies, whether from XShares or any other provider.

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

If the economy is to survive, we need to have winners in all therapeutic areas. And one can look at the products in development and know that is possible. A "broad biotech ETF" does not provide meaningful exposure to many of these companies. In addition, individuals care more about one therapeutic area than another and some may know more about one area than another.

Different therapeutic areas will look "more promising" at different times. That is why it is important to have well-defined portfolios.