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ProShares Sapir: Defining Alternative ETFs

Olly Ludwig


It’s easy to forget that ProShares is becoming a lot more than the world’s leading provider of leveraged and inverse ETFs. Yes, the lion’s share of the Bethesda, Md.-based firm’s $23.31 billion in assets is in geared funds, but that would be ignoring the suite of alternative ETF products the company has launched more recently, including the $46 million ProShares Hedge Replication ETF (HDG).

When IndexUniverse.com Managing Editor Olly Ludwig caught up with ProShares Chief Executive Officer Michael Sapir recently, Sapir made clear that he aims to make his company the first one investors and advisors think of when they want to integrate “alternative” investments into portfolios to better manage risk and volatility. And to the extent alternative means different things to different people, Sapir says ProShares, through the products it launches, will be front and center in helping the world of investments formulate the very definition of the word.

IU.com:So what does “alternative ETF company” mean in your mind? That word could mean a lot of things to different people, and to call your company that made me wonder, are you engendering misunderstanding?

Sapir: Our goal is to become the premier provider of alternative ETFs. The term “alternative” hasn’t been defined with finality at this point. But I think what most people can agree on is that it doesn’t mean long-only conventional equity and fixed-income investments.

And I think there would be general agreement that some of the areas that we’ve entered into recently like private equity, hedge fund replication, long/short strategies and merger arbitrage are considered alternative strategies. If there’s a disagreement out there, it’s really around the edges.

I think “alternatives” is somewhat like what the Supreme Court said about some things, which is, “You know it when you see it.”

IU.com:So by dint of what you bring to market, you’re going to help to define what “alternative” means?

Sapir: What we’re trying to do is introduce products that can help lower volatility and reduce risk when introduced into a portfolio over the long run.

IU.com:I presume you define your company’s original initiative, leveraged and inverse securities, as alternatives, yes?

Sapir: I think most observers out there consider geared ETFs to be within the sphere of alternatives.

IU.com:Let’s switch gears here. The ETF industry is 20 years old—SPY launched in January ’93, and now total ETF assets under management (AUM) are fast approaching $1.5 trillion. Fund closures accelerated last year, fund launches have decelerated somewhat and yet the ETF juggernaut continues to gather steam. Paint some broad brush strokes for me to help me see the way you view this industry’s prospects.

Sapir: Well, I think the exchange-traded fund industry still has a long runway ahead of it. While ETFs have experienced tremendous growth, they only have 13 percent of the assets that mutual funds currently have. So I see tremendous opportunity for growth. You’re going to see growth in areas where you’ve seen growth previously. But we also see other areas where there will be growth, including in the alternative space.

IU.com:You mentioned 13 percent of ETF AUM relative to mutual funds. What’s the pie-in-the-sky scenario there in your judgment? Could there be a complete reversal one day? Is it going to be 50/50? Or is there a clear limitation to how much ETFs can expand? You hear a lot of pie-in-the-sky stuff, and then you hear more sober outlooks. Where do you fall on that spectrum of views about this particular trend?

Sapir: I’m very optimistic about the future of the ETF industry and the growth of the industry. We are likely to continue to see the level of assets come into ETFs. To a large extent, the growth of ETFs in my view has to do with a seismic shift in the way people view investing.

Back in 1993, when the ETF industry launched, most investing revolved around security selection.


IU.com:The Peter Lynch kind of world view?

Sapir: It was about, “How can I pick securities in a way where I outperform the benchmark?” But that world has shifted now. And what you’re seeing is less emphasis on securities selection and more on portfolio construction. As a result of that, you’ve seen this tsunami force of assets flowing out of active investing and into passive investing. And for a lot of investors, the vehicle of choice to obtain passive investing exposure is the ETF.

The other thing you’ve seen is the shift from “I’m going to buy this stock,” to “I’m going to buy this part of the market, or this part of the economy and assemble pieces of the markets into portfolios rather than using individual securities.”

IU.com:Do you find that the pursuit of alpha via index vehicles that we’re now seeing these days is sensible, or is that just the latest iteration of a fool’s errand?

Sapir: It’s human nature to not want to be average at anything. But at the same time, I think what recent history has driven home for a lot of investors is the need for less volatile portfolios.

As we’ve talked to financial advisors and other investment professionals, it seems to be less of a “Hey, I’m going to knock the lights out in this portfolio.” So, more of a focus on “How can I smooth out the ride and still produce a good return”—but not necessarily an incredible return where you’re riding a rollercoaster.

I think recent history has changed what a lot of investors are looking for.

IU.com:Let’s tighten the focus on your company:What and where are the opportunities for ProShares?

Sapir: Sure. In the basic indexing world—let’s call it the prime real estate—has been taken up already by ETF providers. The S'P500, the Russell 2000—those all are household names and have been spoken for. You’ve seen parts of the investment landscape being covered by ETFs over time. First you saw this large introduction of products around equities and strong hockey-stick growth. Then you saw commodity ETFs. Then came fixed-income ETFs and so forth.

An area that we think investors need products to help build better portfolios, where there isn’t sufficient ETFs out there right now, is within the alternative space.

IU.com:Here’s where the rubber meets the road! Let’s talk alternatives:What does that mean? What kinds of products are we talking about?

Sapir: What we’re looking to do at ProShares is offer the investor who thinks they have a well-constructed portfolio with all the basic components a suite of alternative products that can help reduce risk and reduce volatility. We hope those investors turn to ProShares for that strategy.

For example, I’m an investor and I’m thinking I want to add private-equity exposure to my portfolio, but I want it in a liquid, transparent, relatively low-cost sort of way. How can I get that? I think about an ETF. My first thought is, maybe ProShares has one of those. Our goal is to make sure that we make those basic categories of alternatives that people might want available through an ETF vehicle.

IU.com:So you’ll have a sort of brand resonance in that very particular niche?

Sapir: Right. When an investor or a financial advisor thinks of obtaining alternative exposure through an ETF, we want their first thought to be ProShares. That’s our goal.

IU.com:Can you speak specifically about pockets of the market where you might be bringing out product?

Sapir: What we are looking at are strategies that are not long-only fixed income or long-only equities. So if you look at what we’ve done so far, when investors think of alternatives, what do they think of? They think of hedge-fundlike returns.


IU.com:And private equity?

Sapir: And private equity. They think of long-short strategies. They think of strategies that have a built-in hedge component to them. So those are the sorts of things that you can expect from ProShares going forward.

IU.com:Let’s go back to your original area of product innovation, leverage and inverse. I’m wondering what your view is about the growth potential that’s left in that market. You have quite a lot of assets in that space—more than $20 billion. Is there any growth left, or is that market pretty much accounted for in your judgment at this point?

Sapir: We think there’s very good growth potential in what we call the geared ETF space. The last couple of years we’ve seen about $6 billion of net flows going into those ETFs. This year so far we’re up about $2 billion in assets in geared ETFs.

IU.com:Now the $6 billion figure you just shared with me, is that industrywide or is that ProShares?

Sapir: That’s ProShares. Investors use geared ETFs in a variety of ways, including in a lot of cases as risk-mitigation tools. We see great opportunity for growth here because investors are always looking for ways to negate risk.

IU.com:Are you satisfied at this juncture—after all the water is under the bridge following FINRA’s look into leveraged and inverse funds and the lawsuits against you that were thrown out as meritless—that advisors do have a handle on how these things work, that they understand that a fund that rebalances daily is not really going to give you returns like a plain-vanilla fund Or do you think there’s more education that needs to occur here?

Sapir: Well, if you go back in history when new innovative products are introduced, there is a natural education curve that the public goes through. You go back to consumer products. You look at financial products. Innovative products frequently—because they’re innovative—might not be fully understood when they’re first introduced.

We spend a lot of our time educating financial professionals and investors on all our products, including the geared products. We feel that our investors have a good understanding of the products and how they work, and what they’re for and what they’re not for.

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