U.S. markets closed

Big-Time ETF Strategist Now An Issuer

Cinthia Murphy
Jon Maier

Jon Maier was known as one of the ETF market’s biggest strategists, working as senior portfolio manager for ETF business at Merrill Lynch Wealth Management. He built up that business to some $50 billion in just eight years. Now, he’s helping lead Global X Funds as chief investment officer, continuing his work with ETFs from the product side. He tells us why he made the move, and where he sees the biggest opportunities ahead.

ETF.com: You were hugely successful as an ETF portfolio manager at Merrill Lynch. Why did you leave Merrill?

Jon Maier: I started off in the business as a closed-end fund analyst and ETF strategist at UBS for approximately 11 years. I spent most of my time on closed-end funds; the ETF business was a lot smaller at the time.

I left UBS in 2007, joined Merrill Lynch in global research working with closed-end funds, and in 2009 I was asked to take over their small asset allocation ETFs strategy business.

The models at that point were rather basic. They were designed to take advantage of Merrill Lynch’s asset allocation. They were originally created in 2005, when the ETF market was rather small, so the portfolios used plain-vanilla ETFs. When I took them over in 2009, I took a wholesale review of the existing models, and I thought there were opportunities for differentiations across different risk profiles.

Certain ETFs were more suitable for more aggressive portfolios versus others that were more suitable for more conservative portfolios. And there was a lot of levers at that time in the market in 2009 to dial up and dial down volatility as needed, or dictated by the type of portfolio we’re trying to build.

The portfolios were originally housed within global research. They were eventually moved over to the wealth management side. My job switched to focusing purely on ETFs, because the market and the use of the models was a lot bigger.

Over time, as the portfolios grew and grew, I thought it was time to take a new challenge, look for a different type of opportunity, and try to take a shot on the product side. I worked at two large firms for close to 20 years, and the ETF business was continuing to grow. I wanted to take advantage of that.

ETF.com: Global X is a thematic ETF issuer with a diverse product lineup—the 19th-largest issuer by assets. Why Global X?

Maier: The ETF business is dominated by three large players. When you look at other providers, some have an interesting product suite, other providers have a strong sales team, and potential opportunities for growth.

When I looked at Global X’s product suite, I actually saw more than thematics. Thematics are working quite well right now, and I’d like to believe we dominate the thematics space, but we also have income, country exposure and factor-based ETFs, as well as a few other types of ETFs—risk management.

I see it as a small company with a bunch of different verticals, a solid sales team and a really nice culture. I felt the culture was suitable to my personality.

 

ETF.com: As chief investment officer of Global X, what exactly does your job entail? Are you helping manage ETFs, or are you busy on product development?

Maier: The really interesting and exciting aspect of a small organization is that you have the opportunity to be involved in a lot of aspects of the firm.

I’m involved in developing new products, and in putting a macro message around our product suite. My expertise has been to develop model portfolios. And that’s something we’re looking to do right now, in terms of paper models to illustrate how to use some of our existing ETFs in conjunction with other ETFs to create a more balanced portfolio and investment solution for our client.

If somebody asks us, “How do you use the Global X SuperDividend US ETF (DIV)?,” I can provide a suggested allocation on how to use that in an entire portfolio context, in a risk-managed way. I can provide to financial advisors how to think about some of our ETFs—I call them paper models.

ETF.com: Is that your biggest contribution to the ETF business? Has it been challenging to make this transition from portfolio manager to issuer?

Maier: I think my biggest value-add is to explain my past experience and how that filters through to our existing product line; how to use them in a broader portfolio context; how to think about portfolios and entire solutions for clients.

I’ve discovered there are a lot of financial advisors—whether it be in the Merrill system or UBS or people who know of me—who are interested to hear about the models I ran, the success of that program and what the key drivers of success were.

I’m acting as a consultant, providing my experience, as well as giving concrete solutions on how to use our ETFs. Therein lies some of the challenge. We have an interesting product suite of income, thematics, countries, but we don’t have all ETFs. I have to recommend other issuers’ ETFs, in conjunction with our own, to come up with that complete solution.

ETF.com: What are the key drivers of success when it comes to building a portfolio?

Maier: Diversification, diversification, diversification. It’s a simple concept, and people forget it. One of the cool things about ETFs is they’re inherently diversified, although they may be focused on a particular sector or theme. Whenever you're constructing a portfolio, you can't forget that concept.

That being said, if I want to create an income portfolio, where is my income coming from? And in all the sectors or areas I'm invested in, where's the diversification coming from? My concept is to balance risk by adding other exposures to provide a better risk-adjusted solution.

ETF.com: How do you choose ETFs, particularly smart-beta ETFs, where it’s not as simple as picking the cheapest one?

Maier: I wrote a paper called “Passive’s Not Passive.” The concept is that there's an active component to decision-making, and while most ETFs are index-based, and they follow a set of rules, those rules were created by somebody.

There are ETFs that look similar to each other but that can be very different. Do you want a purely large-cap ETF, or do you want a large market-cap-weighted ETF with some small-cap exposure?

If you're looking at two technology ETFs, what's the difference between the two? If you look at a SPDR versus a Vanguard technology sector, you’re going to get a slightly different exposure with the Vanguard Information Technology ETF (VGT) than the Technology Select Sector SPDR Fund (XLK). That’s pretty basic.

Another thing to look at is fees. There can be two ETFs in the market that have similar exposures, similar correlations, but one is half the price of another. That matters.

 

ETF.com: Are there specific pockets of the market where you see the most opportunity for an issuer today?

Maier: If you look at the market, there are the basic low-cost ETFs. And a lot of the assets are focused there. You then have the next tier, which is factor-based ETFs and market-cap types of ETFs.

I see the thematics space evolving. What I'm seeing with a lot of the thematic ETFs is a convergence in some ways—we have, say, the Global X Robotics & Artificial Intelligence ETF (BOTZ), but is it technology or is it industrial? It’s definitely cross-sector.

The Lithium [Global X Lithium & Battery Tech ETF (LIT)]—is that a commodity or a technology? Or is that some sort of industrial use? You’re seeing a movement of sectors into these disruptive themes. And I think that’ll continue to evolve over time.

ETF.com: Global X has today 51 ETFs with $6.7 billion in assets. It’s closed seven ETFs this year, launched two. Last year, it launched seven, closed one. Previous year closed four. How do you decide what's a good ETF idea? Or do you think that’s just pretty normal churn?

Maier: It’s the nature of the market. We could sit in a product committee meeting and try to figure out a potential need in the market. A potential need in the market could simply mean that we need to come out with something that’s cheaper.

For example, if you look at our Global X MLP ETF (MLPA), it’s rather similar to the Alerian MLP ETF (AMLP), but MLPA is approximately half the price.

We recently came out with the Global X U.S. Preferred ETF (PFFD), which is similar to the iShares U.S. Preferred Stock ETF (PFF), but it’s half the price. One fund has billions, one has a couple million.

Over time, as people recognize the expense ratio, there’ll be a migration of assets. First to market is really important, without a doubt. Having a great ticker is really important, no question. Being cheaper, you just have to make people aware that there's a cheaper option out there. We’re either at or cheaper than most funds out there in the space we operate in.

There's a cost to keeping funds open. The funds we close tend to be low adopters. But you never know when an idea or a theme is going to hit. For example, you look at the Global X Lithium & Battery Tech ETF (LIT), which is now our second-largest fund. It’s been out since 2010, but that theme really played out this year.

ETF.com: Are fees going to be a driver in product development going forward, especially as we enter a DOL fiduciary-rule world?

Maier: Fees are always on people’s minds. Over time, you’ll see depression of fees across the board. I wouldn’t be surprised to see ETFs close to zero.

ETF.com: Could model ETF portfolios ever be free?

Maier: Of course they can be. And with my prior job, they were free in a sense. You have the underlying expenses of the ETF, and you have a platform fee that the firm would charge. But we didn’t charge anything for the model. If at some point in the future we came out with a model, I’d say it would be free. Would there be some Global X ETFs in there? Sure. And that’s how you get big.

Contact Cinthia Murphy at cmurphy@etf.com

 

Research All ETFs Related to This Story

Permalink | © Copyright 2017 ETF.com. All rights reserved