RiverFront is the second- largest ETF strategist in the country today, with some $5.5 billion in assets under management. But the firm has been growing another footprint as well—that of subadvisor to a growing roster of ETFs offered by ALPS and First Trust.
There’ve been eight actively managed ETFs brought to market in recent months, tapping into everything from U.S. to international equity to fixed income. The funds include:
With First Trust:
RiverFront also subadvises the RiverFront Strategic Income Fund (RIGS | B-34), which launched in 2013, and has $324 million in assets.
Rob Glownia, analyst with the Richmond, Virginia-based firm, tells us how RiverFront’s push into launching ETFs jibes with its role as an ETF strategist, and how advisors can benefit from it all.
ETF.com: RiverFront subadvises nine ETFs today through two different issuers. At one point you also considered a lineup with PowerShares. Why work with different providers? Is it to reach a broader audience, or does it have to do with RiverFront's philosophy as a firm?
Rob Glownia: Part of it is based on asset class. We already had a fixed-income product with ALPS that we launched in 2013. And two of the eight funds we've recently launched are fixed-income products, so the natural fit was to continue with ALPS, because we had a standing relationship and a process we could leverage and use.
We also had two U.S. equity funds, and ALPS has this great operational chassis to run these funds, so we, again, partnered with them.
On the other side, we launched four international funds with First Trust. Part of the reason for going with First Trust, in addition to their great reputation, is that there are some complexities with running an international fund. We were impressed with their capabilities, whether it was for currency hedging or fund accounting and the like. It was a natural fit to work with them on those ETFs.
ETF.com: So, for the investor, the easiest way to distinguish between these families of RiverFront ETFs with different providers is by asset class.
ETF.com: They are all actively managed ETFs, and they're all different flavors of strategic-beta or factor-based investing. Is that what sets RiverFront apart?
Glownia: Whether it's for these ETFs or for how we manage our separately managed accounts, our belief is that investing is done best by having a quantitative approach, and a qualitative overlay. We like to have quantitative tools, whether it's using factors or sectors of thematic investing. But the quantitative approach is informed by qualitative judgment.
ETF.com: If you look at actively managed ETFs today, two things stand out. First, there are only some 151 funds out of 1,900-plus ETFs. Secondly, there aren’t that many success stories, and the few we see are often in fixed income. Why choose active ETFs vs. passive?
Glownia: Active is what we've done. Active is something that gives flexibility. Think about Brexit as an example. An index can’t adapt to such a fluid-type scenario as Brexit. We believe active gives us flexibility to adapt and to make inter-month changes, where an index is tied to the rules that don’t allow for tactical changes.
Now, I agree there haven't been a lot of success stories in active. Part of that's because a lot of active managers aren't comfortable with the structure of an ETF, where you have to disclose your holdings daily. They feel like they're giving away their secret sauce by having to disclose what they own.
But since inception, at RiverFront, we've updated all of our holdings daily, and anytime we make a change to the portfolio, we publish a trade rationale for our partner advisors. We are very transparent. We call ourselves the asset manager with glass walls. To put our active strategy into an ETF structure doesn't give us a lot of heartburn.
ETF.com: A lot of it has to do with fees, right? You can charge more for a secret sauce. If that’s the issue, do you think active-equity ETFs will ever take off? What’s the market for your equity funds?
Glownia: We're launching these products with the expectation that the industry and the active ETF space will continue to grow.
Until now, most of our suite of products have been global asset allocation and separately managed accounts. We've developed really deep relationships with a whole bunch of advisors that are looking for a global asset allocation solution. What we didn’t have was tools for the portfolio-manager advisors who want to do their own asset allocation. They don't want to take our asset allocation and outsource that. They think that they have the expertise to do the same.
We didn't really have a product to serve those advisors who may want just a piece or two of our solutions. Now, if someone, say, reads our commentary and likes our stance on international equities, or they really like our fixed-income approach, we have an ETF that they can go and buy. They can take that piece of the puzzle and use it in their practice.
ETF.com: So that's how having ETFs jibes with your role as an ETF strategist? It's a way of serving advisors with piecemeal or entire portfolio solutions?
Glownia: Yes. The genesis of this idea came from our current financial advisors we partner with. We're trying to kill a couple of birds with one stone. These ETFs that we've launched are the puzzle pieces. They can be bought individually.
Eventually we want to launch a comprehensive solution that includes those eight ETFs [excluding RIGS] organized in an asset allocation portfolio. Our clients could subscribe to a model that we produce that comprises these eight different funds, which would hopefully be a lower-turnover portfolio.
Right now, when we put together an ETF portfolio, if we want to go underweight financials, or overweight tech, there's a taxable event. We need to sell one third-party ETF and buy another third-party ETF.
For a taxable account, that's an obstacle. There's a cost to that, whereas the new model portfolios will experience many of these transactions at the ETF level. We believe this ability will potentially result in fewer transactions and create lower turnover in the new models.
ETF.com: RiverFront also has a role as an ETF strategist. Does subadvising ETFs impact at all your ETF selection process for your model portfolios? Any conflict of interest?
Glownia: They're two different products. For the current business that we run—which is using third-party ETFs predominantly—think of it as diversifying your genius. You're taking our asset allocation, and the implementation and selection is done through third parties that build and structure different ETFs.
In the new model, you'll be having our asset allocation, but the security selection will be based on RiverFront's approach. It's really a matter of preference. One is not better than the other. They're different. But again, I'd expect that the overarching strategy will be similar; it's just a different implementation.
ETF.com: And even though you firmly believe in active management, you still use passive ETFs in your model portfolios?
Glownia: We do. As a strategist, even if you're using an entire portfolio of passive products, you're still making active decisions—because those passive products are a beta, but how you allocate among those passive products, by definition, is an active process.
That's what we do. The majority of the ETFs we use today are third-party ETFs that are passively managed, index-based, because we can model the return stream and there aren't many surprises as to what's in the index.
It's not to say that there are times where you want an active manager. We don't own bank loans right now, for example, but if we were to go into that space, we'd have to really consider paying up for an actively managed bank loan ETF versus passive. Some pockets of the market warrant that.
But again, we do believe in active, and that's why we're in this business.
Contact Cinthia Murphy at firstname.lastname@example.org.