Behind the Ticker

In a recent episode of Behind the Ticker, Rob Arnott, founder and chairman of Research Affiliates, shared insights into the firm's latest innovation, the Research Affiliates Deletions ETF (ticker: NIXT). With nearly 50 years in investment management, Arnott has built a reputation for pioneering quantitative investing strategies, particularly through the development of the Fundamental Index methodology. Research Affiliates, founded in 2002, now indirectly oversees $158 billion in assets through partnerships with firms like Schwab, Invesco, and PIMCO.

Arnott explained that NIXT was created to exploit inefficiencies in traditional market-cap-weighted indexes. When companies are removed from major indices like the S&P 500 or Russell 1000, they often experience exaggerated price declines, pushing them to deep value levels. Historically, these "deleted" stocks tend to recover significantly, often outperforming the market in the years following their removal. NIXT systematically captures this mean reversion by identifying and investing in stocks that have been dropped from indices due to temporary underperformance rather than fundamental deterioration.

The fund follows a rules-based process where deletions from the top 500 and top 1,000 market cap rankings are screened for quality metrics, eliminating the bottom 20% to avoid value traps. The remaining stocks are then held in equal weight for five years, allowing time for revaluation and recovery. Arnott noted that this approach benefits from both the structural inefficiencies of index deletions and the broader opportunity in small-cap and deep value stocks, which are currently trading at historically low relative valuations.

Arnott positioned NIXT as a unique completion strategy, complementing traditional market-cap-weighted portfolios by reintroducing stocks that indices have discarded too soon. While not intended as a core allocation, NIXT provides an alternative way for investors to gain small-cap value exposure with a systematic, contrarian approach.

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n a recent episode of Behind the Ticker, John Davi, founder and CIO of Astoria Advisors, discussed the firm's latest ETF launch, the Astoria US Quality Kings ETF (ticker: GQQQ). With over two decades of experience in quantitative investing and asset allocation, Davi founded Astoria in 2017, building a firm focused on macro-driven and quantitative investment strategies. Managing approximately $2 billion in assets, Astoria serves financial advisors, institutions, and ultra-high-net-worth individuals.

Davi explained that GQQQ was created to address a gap in the growth investing space. While many existing growth ETFs are purely market-cap weighted, GQQQ combines growth with a quality filter, ensuring exposure to high-growth companies while maintaining fundamental financial strength. Unlike broad Nasdaq-based ETFs, which include all non-financial large-cap stocks without quality screening, GQQQ applies quantitative selection criteria focusing on return on equity (ROE), return on assets (ROA), and return on invested capital (ROIC). This results in a portfolio that captures growth opportunities while reducing exposure to weaker companies.

The ETF blends large-cap and mid-cap stocks, aiming to identify the next generation of market leaders. Davi highlighted AppLovin as an example—GQQQ included the stock in its launch portfolio in October 2023, months before it was added to the Nasdaq 100, allowing early participation in its strong performance. By including mid-cap growth names, GQQQ seeks to capitalize on emerging winners while mitigating the concentration risks seen in traditional growth ETFs dominated by the "Magnificent Seven" mega-cap tech stocks.

Davi also emphasized the risk management strategies within GQQQ. The ETF undergoes an annual rebalance with quarterly quantitative reviews, allowing for adjustments when stocks significantly de-rank in quality metrics. While not a tactical allocation product, this process ensures that the fund remains aligned with its quality-growth mandate. He positioned GQQQ as a complementary holding to existing growth ETFs like QQQ or Vanguard's growth ETFs, offering a more refined and risk-conscious approach to growth investing.

For advisors and investors looking to incorporate GQQQ into their portfolios, Davi suggested it as a way to diversify traditional growth exposure, especially given the heavy concentration in a few stocks within broad-market growth indices.

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In a recent episode of Behind the Ticker, Mike Loukas, CEO of TrueShares, shared insights into the firm’s journey and the unique approach behind their ETFs, including their latest launches, QBUL and QBER. Loukas, with over 30 years of experience in the financial industry, founded TrueMark Investments in 2019 with the purpose of establishing TrueShares as a solutions-based ETF platform. TrueShares aims to take traditional active strategies and institutional hedging techniques and incorporate them into ETFs that offer investors smarter portfolio construction tools.

Loukas explained that TrueShares’ ETF lineup started with fundamental active management products and expanded to include thematic and structured outcome ETFs. Their defined outcome or buffered ETFs have been popular among investors seeking downside protection while maintaining exposure to equity growth. Most recently, the firm launched QBUL and QBER, two quarterly resetting hedged equity ETFs designed to offer principal protection with directional market exposure.

QBUL aims to capture market gains beyond a 5% threshold within a quarter while maintaining treasury-level downside protection. In contrast, QBER generates positive returns when the market drops by more than 5%. Both funds use a structure where principal is invested in treasuries, and the yield is used to purchase out-of-the-money call options (for QBUL) or put options (for QBER). This approach ensures low risk exposure with the potential for asymmetric returns based on market movements.

Loukas highlighted the flexibility of these ETFs within a portfolio, explaining that they can be used as standalone investments or blended with other asset classes to create diversified, risk-adjusted strategies. Advisors can use QBUL in bullish markets to enhance upside potential while maintaining principal security, and QBER in bearish markets to hedge against significant declines without taking on the risks associated with shorting the market.

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In a recent episode of Behind the Ticker, Catherine LeGraw, asset allocation strategist at GMO, shared insights into the firm’s approach to value investing and their newly launched ETFs, including GMOV, their U.S. value ETF. LeGraw, who joined GMO in 2013 after working at BlackRock and Barclays Global Investors, brings a top-down perspective to asset allocation, seeking valuation-driven opportunities across asset classes. She emphasized GMO’s commitment to long-term value investing and its employee-owned structure, which allows the firm to focus solely on clients’ best interests.

LeGraw explained that GMOV stands out among value-focused ETFs due to three key differentiators. First, GMO takes a top-down approach, looking for entire groups of dislocated or misvalued stocks, rather than relying solely on bottom-up stock selection. Currently, the fund focuses on the cheapest 20% of the market, which GMO believes represents a tremendous opportunity for deep value investing. Second, the firm does not rely on standard accounting data but instead restates financials to reflect true underlying value, such as treating research and development expenses as investments rather than operating costs. Lastly, GMO incorporates forward-looking projections tailored to each company’s unique characteristics, providing a more accurate estimate of future profitability.

GMOV also applies rigorous portfolio construction techniques to balance deep value opportunities with quality and growth characteristics, avoiding common value traps. LeGraw highlighted GMO’s use of proprietary red flag screening, which examines accounting metrics, management behavior, and market signals to identify potential risks. The fund consists of approximately 150 names, with sector weightings determined by valuation attractiveness rather than traditional market cap constraints. Unlike many passive value ETFs that may be overweight in sectors like utilities, GMO’s active approach allows them to avoid sectors they consider overvalued.

In addition to discussing the U.S. market, LeGraw also touched on GMOI, their international value ETF, which she believes offers an even greater opportunity given the relative cheapness of international equities and the potential tailwind of currency valuation shifts. She emphasized that value investing is currently priced for significant outperformance, with deep value trading at historically attractive levels.

For advisors and investors looking to diversify their portfolios away from an overconcentration in U.S. large-cap growth, LeGraw suggests GMOV and GMOI as substitutes for passive value exposure or as tactical allocations to capitalize on the current value opportunity. 

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In a recent episode of Behind the Ticker, Kevin Carter, founder of EMQQ Global, shared his journey into investment management and the inspiration behind his suite of emerging market internet ETFs, including INQQ, which focuses on India’s rapidly growing internet sector. With a background that began at Robertson Stephens in 1992 and included pioneering direct indexing and active indexing, Carter’s passion for emerging markets and digital transformation culminated in the creation of EMQQ Global and its targeted ETF offerings.

Carter discussed the investment thesis for INQQ, highlighting India’s unique position as the world’s largest and fastest-growing emerging market. With a population exceeding 1.4 billion, robust demographics, and a booming middle class, India presents unparalleled opportunities for consumption-driven growth. Carter emphasized India’s ongoing infrastructure and technological advancements under Prime Minister Modi, particularly the “India Stack,” a revolutionary digital public infrastructure. The stack has transformed India’s economy by enabling biometric identification, digital payments, and financial inclusion for over 800 million people in just a few years.

INQQ provides investors exposure to the burgeoning internet sector in India, which Carter described as being in its early stages of growth. The ETF focuses on publicly traded Indian internet companies that meet market cap and liquidity thresholds, offering a diversified portfolio across various verticals, including e-commerce, payments, and online travel. Companies like Paytm and MakeMyTrip exemplify the opportunities available as digital adoption accelerates, with many sectors still in the nascent stages of development.

Carter underscored the importance of INQQ as a standalone investment opportunity within emerging markets, appealing to those seeking targeted exposure to India’s digital transformation.

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In a recent episode of Behind the Ticker, David Dziekanski, founder and CEO of Quantify Funds, introduced his firm’s first ETF, the STKD Bitcoin and Gold ETF (ticker: BTGD). With 17 years of experience in the investment and ETF industry, including 11 years as a partner at Tidal Financial Group, Dziekanski launched Quantify Funds to bring innovative, efficient investment solutions to market. BTGD represents a novel approach to leverage ETFs, offering exposure to both Bitcoin and gold in a single investment vehicle.

BTGD is structured as a “stacked” ETF, providing $1 of exposure to Bitcoin and $1 of exposure to gold for every $1 invested. This 50-50 blend offers a leveraged, long-term approach without the typical path dependency or decay associated with traditional leverage products. The fund utilizes a combination of futures and exchange-traded products to optimize leverage and manage rebalancing efficiently. Dziekanski explained that the fund targets a 5-7% rebalance drift to minimize trading costs while maintaining the desired asset allocation.

The rationale behind combining Bitcoin and gold lies in their shared status as scarcity assets. Gold, with its historical role as a store of value, and Bitcoin, often referred to as “digital gold,” both offer protection against currency debasement. Dziekanski noted that the mining rates of Bitcoin (0.86% annually) and gold (1.75% annually) are significantly lower than the 7-9% annual currency printing rates of developed nations, making them ideal assets for a hedge against inflation and declining currency values.

Dziekanski also highlighted how the differing volatility and correlations of Bitcoin and gold enhance the portfolio’s resilience. Bitcoin’s higher volatility is balanced by gold’s stability, allowing for effective rebalancing during market shifts. Historical data shows that gold has performed well during past crypto winters, providing diversification benefits and mitigating drawdowns. Advisors are encouraged to view BTGD as a debasement hedge or a high-volatility alternative in portfolios, with suggested allocations ranging from 2-5%.

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In a special edition of Behind the Ticker recorded at the UT CATT 2024 Global Analytics Conference, host Brad Roth moderated a panel discussion exploring the future of AI in finance. The panel brought together leading voices in the field: Kyle Wiggs, co-founder and CEO of UX Wealth Partners; Sudhir Holla, founder and CEO of MyStock DNA; and Tal Schwartz, founder of AI Funds. Together, they examined how artificial intelligence is revolutionizing portfolio management, addressing longstanding industry challenges, and opening up new possibilities for smarter investment strategies.

Kyle Wiggs highlighted the operational challenges and opportunities AI presents to financial advisors. He explained how UX Wealth Partners bridges the gap between sophisticated AI-driven strategies and practical implementation for end clients. By focusing on trading, billing, and reporting across multiple custodians and account structures, Wiggs emphasized the importance of scalability and efficiency in delivering cutting-edge solutions to the wealth management community. He also stressed that AI’s role should complement human advisors rather than replace them, describing the concept as “man and machine” working together to enhance outcomes.

Sudhir Holla brought a different perspective, emphasizing MyStock DNA’s philosophy of “winning by not losing.” He explained how their AI engine, Darwin, helps mitigate downside risk while managing large volumes of data and human emotions that often derail investment decisions. Holla introduced the concept of an “emotional risk frontier,” suggesting that AI could help create individualized portfolios tailored to each investor’s emotional tolerance for market volatility. His analogy of AI as a “self-driving car” for portfolios resonated, showcasing how the technology navigates complex market conditions while aiming for safety and efficiency.

Tal Schwartz provided insights into the quantitative and predictive power of AI in active portfolio management. He shared details about his AI engine, BAILA (Bayesian AI Learning Algorithm), which acts as both a macro strategist and portfolio optimizer. BAILA’s ability to identify market environments and adapt to changing conditions offers a smarter alternative to traditional active strategies. Schwartz highlighted AI’s capacity to outperform human managers by leveraging massive datasets and eliminating emotional biases, enabling portfolios to achieve asymmetric returns with minimized downside risk.

The panelists agreed on the transformative potential of AI but acknowledged challenges, including regulatory hurdles, biases in training data, and the need for human oversight. They emphasized that while AI has made significant strides, its most impactful applications lie ahead, particularly in democratizing access to sophisticated investment tools. The discussion underscored AI’s potential to reshape finance, from enhancing risk management to delivering tailored solutions for investors at all levels.

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In a recent episode of “Behind the Ticker,” Al Chu, portfolio manager at Man GLG, discussed his role managing the American Beacon GLG Natural Resources ETF (ticker: MGNR). Chu, who has over two decades of experience in natural resources investing, described his journey from managing natural resources strategies at BNY Mellon and various hedge funds to leading this strategy at Man GLG. With the backing of Man Group, a UK-listed alpha-focused alternative manager, Chu’s expertise is now accessible to a broader audience through the active ETF structure.

Chu explained that MGNR takes a long-only, equity-based approach to natural resources investing, distinct from many other commodity ETFs that rely on futures or fund-of-funds models. The ETF focuses on equities within the natural resources space, such as oil producers, oilfield services, and mining companies, aiming to capitalize on alpha opportunities driven by commodity cycles. The active strategy allows the fund to adjust exposures dynamically, targeting subsectors and companies that offer the highest return potential based on commodity trends, regional dynamics, and bottom-up company analysis.

A unique aspect of MGNR is its structured investment process, which begins with identifying favorable commodity cycles, then drilling down into specific subsectors, and finally selecting companies with strong fundamentals, management, and assets. Chu highlighted the importance of maintaining diversification within the fund, capping individual positions at 5% and limiting sector and subsector concentrations to manage risk effectively. The fund typically holds 40 to 50 names, representing a concentrated yet diversified exposure to the natural resources space.

Chu also addressed the fund’s appeal to advisors and investors looking for exposure to real assets with low correlation to traditional equities and bonds. MGNR is positioned as an alternative to passive commodity exposure, providing not only a hedge against inflation but also an opportunity to benefit from the operational and financial leverage of resource companies.

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In a recent episode of “Behind the Ticker,” Raymond Holst from Practus LLP discussed the intricacies of 351 exchanges and their relevance to the ETF industry. Holst, a tax attorney with over 20 years of experience, joined Practus in 2023, bringing extensive expertise in financial products and taxation. Practus, a fully virtual law firm with attorneys across the United States, specializes in ETF and mutual fund markets, offering tailored legal and tax solutions.

Holst explained that a 351 exchange refers to a provision in the Internal Revenue Code allowing for the transfer of property into a corporation in exchange for shares without triggering immediate tax recognition on built-in gains. This mechanism is particularly useful for asset managers looking to convert separately managed accounts (SMAs) or private funds into an ETF wrapper. The process enables investors to transfer diversified securities portfolios into an ETF while maintaining their original tax basis and avoiding taxable events.

Key requirements for a successful 351 exchange include maintaining at least 80% ownership in voting and value by transferors post-exchange and adhering to diversification rules. Holst elaborated on the 25/50 diversification test, which ensures that no single security exceeds 25% of the portfolio and the top five securities do not exceed 50%. These safeguards are essential to comply with tax regulations and ensure the exchange qualifies under the 351 provision.

Holst emphasized the importance of partnering with experienced professionals for 351 exchanges, noting the complex coordination required among custodians, fund administrators, and legal advisors. While the process is tax-efficient, it involves significant logistical work, particularly in transferring tax information and establishing proper valuations. Once completed, however, ETFs formed through 351 exchanges operate like any other ETF, offering investors liquidity, marginability, and tax advantages.

For asset managers considering launching an ETF using a 351 exchange, Holst highlighted the long-term benefits, including improved tax efficiency and operational flexibility.

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In a recent episode of “Behind the Ticker,” Garrett Stevens and Rich Malinowski from Exchange Traded Concepts (ETC) discussed the firm’s unique position as the first white-label ETF issuer and its role in supporting clients from concept to launch. ETC, which has been operating for 13 years, has launched over 100 ETFs with a combined $7.5 billion in assets under management. The firm provides a turnkey platform for ETF issuers, handling everything from regulatory filings and portfolio management to marketing and website development, while also offering individual services for established funds.

Stevens highlighted a growing trend in the ETF industry: wealth management firms launching their own ETFs based on existing strategies. This shift allows advisors to offer tax-efficient, liquid, and operationally streamlined investment vehicles to their clients. He emphasized that these advisor-driven ETFs are often not marketed publicly but are used as tools to enhance the client experience and differentiate wealth management firms from competitors.

The conversation also touched on the growing popularity of actively managed ETFs, which now account for about 75% of new launches. Stevens explained that while thematic and passive ETFs dominated early growth, the focus is now shifting toward active strategies that allow for sector rotation, cross-asset class exposure, and unique management styles. He noted that active ETFs require a longer runway for success, as they often depend on performance to attract investors, contrasting with the quicker adoption of thematic passive products.

Rich Malinowski added insights on mutual fund-to-ETF conversions and semi-transparent ETF structures. He explained that while mutual fund conversions have slowed due to operational challenges and intermediary resistance, they remain an area of interest. Additionally, semi-transparent ETFs face hurdles related to their limited visibility for market makers and custodians, but Malinowski expects gradual acceptance as the industry adapts to these innovative products.

Both Stevens and Malinowski emphasized the importance of preparation and infrastructure for ETF issuers. They advised aspiring ETF managers to secure sufficient assets at launch, target a $30 million breakeven point, and build strong relationships with service providers to ensure operational success.

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