ESG ETFs Help Investment Portfolio’s Conform to Investors’ Attitudes

As many seek to diversify their equity portfolios, consider a sustainable investing exchange traded fund strategy that locks on the potential benefits of environmental, social and governance, or ESG, principles.

On the recent webcast (CE Credit available on-demand), The Untapped Potential of ESG Investing, Sharon French, Head of Beta Solutions at OppenheimerFunds, explained that there is growing demand for ESG investments in response to rising standards for corporate business practices, demographic shifts and investing preferences, regulatory and policy developments, global sustainability challenges, and greater accessibility and proliferation of ESG data.

Meanwhile, French mentioned that corporate business practices are changing as well to meet the shifting demand for more socially responsible investments. For example, more companies are reporting impact investing and social responsibility data as there is a growing body of research on the potential impact of ESG investing.

Among the various investor groups, the rising affluent millennial investor are showing a significant change in investment behavior, compared to their older counterparts. French pointed out that millennials are more likely to be interested in responsible investing than other generations, indicated they would like to work for an employer that makes a positive social impact and like investments with competitive returns that also promote positive social and environmental outcomes.

Financial advisors will undoubtedly be closely monitoring this rising group of investors as $30 trillion in wealth is expected to transfer from the Baby Boomer generation to their heirs.

“It’s important to recognize the critical role that Affluent Millennials will play,” French said. “They will eventually be put in charge of the family portfolios. Many of them plan to increase their allocations towards impact investing, which looks to provide societal or environmental benefits in addition to sustainable investment returns.”

Matthew C. Straut, Head of Registered Investment Advisor Channel at OppenheimerFunds, also argued that the millennial investor may have a much different investment mindset to older generations. For example, millennials are more likely to pull money away from companies that use animal testing, use tax minimization schemes and are in the news for wrong reasons. In contrast, those aged 36 or older are more likely to pull money away from companies linked to repressive regimes and associated with the pron/sex industry.

Michael Venuto, Co-Founder and CIO at Toroso Investments, has seen a shift in financial advisors’ perspective toward a more holistic investment management process. Venuto pointed out that popularity and conversations centered around ESG investing are accelerating among advisors and clients.

“ESG data and policies are here to stay and may become the norm for investment analysis and sere as indicators of future performance,” Venuto said.

In survey of financial advisors attending the webcast, 50% of respondents expect ESG strategies to enhance return over time, but 47% still require further education on the subject, which suggest that many are at least looking at the investment theme. About 55% of respondents also indicated that they expect to increase exposure to ESG strategies over the next 12 months while 45% expect to keep current holdings steady.

Vincent T. Lowry, Lead Portfolio Manager of OppenheimerFunds’ Revenue Weighted Strategies, laid out two two recently launched ESG ETFs – the Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF) – for investors looking to target companies with sound ESG principles.

Specifically, ESGL targets broad U.S. large-caps through the S&P 500 but screens through Sustainalyics’ proprietary scoring system that focuses on those with positive ESG attributes and employs a revenue-weighted methodology.

ESGF, on the other hand, takes a global approach. The ETF tries to outperform the MSCI All Country World Index with strong ESG practices and re-weights companies based on revenue earned. MSCI ESG Research utilizes a proprietary ESG scoring system and screens companies based on Sharpe Ratio, a measure of risk-adjusted performance.

Source: Etftrends

This figure helps explain why so many active ETF managers underperform

Are your active funds active enough?

Non-passive funds—where the components are chosen by a team or through a rules-based system, rather than simply tracking a benchmark—have fallen out of favor in recent years, with investors instead gravitating toward funds that are cheaper, easier to understand, and which never underperform.

Another factor keeping investors from embracing them? These active funds may, in fact, be too passive.

A key metric for evaluating mutual funds and exchange-traded funds underlines why active and “smart beta” products have seen far less adoption than their passive equivalents: active share, or the degree to which the holdings of a non-passive product overlap with its closest benchmark (for example, an active large-cap U.S. equity fund compared with the S&P 500 SPX, -0.20%

If an active or smart-beta fund has a low active share, either by holding the same securities or having similar allocations to its benchmark, then it will have a high correlation with that index. (For this reason, portfolio managers with low levels of active share are frequently referred to as “closet indexers.”) This limits the fund’s potential for outperformance, especially after fees are taken into account.

If investors are able to get similar performance for a cheaper fee, it’s hard for an adviser to advocate for a nonpassive product instead. In fact, data has shown that an overwhelming number of active funds underperform over the long term, as do smart-beta funds.

This could be a reason why active and smart-beta funds have seen comparably less interest. Thus far this year, $5.28 billion has flowed into active ETFs, according to Morningstar data, while $41.2 billion has gone into smart beta, which Morningstar refers to as “strategic beta.” More than $223 billion has gone into passive ETFs.

“There’s a bit of research that shows if you don’t have at least 80% active share, then it’s unlikely that you will outperform after fees,” said Andrew Slimmon, a managing director at Morgan Stanley Investment Management, where he is the lead senior portfolio manager on all long equity strategies for Applied Equity Advisors. Referring to the active managers who notably outperform, he said “the key issue is that they have more dispersion to the index.”

Passive strategies are particularly strong in periods of robust economic growth, when the market’s gains are broad based. Active managers tend to perform better in periods of volatility, as in the third quarter of this year, when 53% of active managers outperformed their benchmark, according to data from J.P. Morgan. That quarter was marked by post-Brexit volatility, as well as uncertainty going into the U.S. election. Because of events like that, Candace Browning, the head of BofA Merrill Lynch Global Research, recently wrote that “2017 could be the year of the active investor.”

Of course, high active share cuts both ways. Assuming a fund doesn’t frequently change its holdings en masse, it will go through periods when its strategy is in vogue, allowing it to outperform, as well as through periods where it is out of sync with the market cycle, leading to underperformance.

“Active share does not mean outperformance. What it means is the potential to outperform,” said Michael Venuto, chief investment officer at Toroso Investments. “No active share means no outperformance, guaranteed. If you have it, then you at least have the potential.”

Venuto uses active share calculations in researching prospective funds to invest in. As an example, he compared the PowerShares Exchange Traded Fund FTSE RAFI US 1000 Portfolio PRF, -0.25% —a large-cap equity fund—with the SPDR S&P 500 ETF Trust SPY, -0.22% which tracks the S&P 500. The two funds have an overlap of 70%, per his calculations, but while the PowerShares fund comes with an expense ratio of 0.39%, the SPDR fund has a fee of 0.09%.

“For that 70%, I should only spend what it costs to get the S&P,” he said. “Therefore, you’re basically paying 30 basis points for the remaining 30%—for the active share. That would be like paying 90 basis points for the fund overall, and I do not feel that there’s enough difference in the active share to justify that expense ratio. This isn’t the only thing I’d look at here, but this alone is definitely enough to deter me from the product.”

Venuto’s calculations were derived from software his firm developed. Invesco, which manages the PowerShares family of ETFs, didn’t immediately return requests for comment.

The average expense ratio for a U.S. smart-beta ETF is 0.356%, according to Morningstar. For a passive fund, it is 0.344%, although many of the most popular offer ratios below 0.1%, and analysts view the passive industry as being in a “race to zero.” Active ETFs that cover U.S. stocks have an average fee of 0.864%.

For a large-cap equity fund that justifies its expense ratio, Venuto cited the Direxion All Cap Insider Sentiment KNOW, -0.05% which has a fee of 0.65% but only a 14% overlap with the S&P 500. “The overlap is so low that the ‘smart’ portion of the portfolio is equal to the expense ratio. What you pay coincides with what you should actually pay.”

He added that in a case like this, he would also research the fund’s strategy, tradability, and spreads before investing.

The problem with active share is that it is difficult to calculate—especially for mutual funds, which don’t disclose their holdings daily, unlike ETFs.

Dave Nadig, the chief executive officer of, an ETF research and analytics firm, said he was of “a mixed mind” about using active share as a guiding principle.

“I’m a skeptic for people leaning too hard on it, as it is challenging to calculate and because it doesn’t predict performance so much as increase the risk for a higher dispersion of performance,” he said. “That said, if you want outperformance, a high-fee low-active manager is not going to give you what you’re looking for. You’d basically be buying an expensive index.”

Source: marketwatch

KNOW Characteristics: Finding the Right Factors

In this paper we will explore the evolution of smart beta investing through the advent of academic factor investing and examine how the characteristics sought by the SBRQAM Index can potentially overweight and/or rotate through the most common factors contributing to competitive performance.

The Sabrient Multi-cap Inside/Analyst Quant-Weighted Index (SBRQAM), is an index that investors can obtain exposure to through the Direxion All Cap Insider Sentiment Shares ETF (ticker: KNOW). For the most recent quarter end performance of the Fund, please see the disclosure page.

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Portfolio X-Ray: Toroso’s Neutral Allocation Strategy

by Cinthia Murphy

There is no single recipe to building an ETF portfolio. But understanding how a portfolio is built is key to picking the right one. And choices certainly abound, with hundreds of ETF strategist portfolios commanding nearly $100 billion in combined assets today.

For that reason, we are setting out to better understand how ETF strategists go about creating these portfolios in a series of interviews that look under the hood of some of the ETF portfolios available to retail, institutional and advisor clients alike.

Today’s Portfolio: The Toroso Neutral Allocation Strategy

Provider: Toroso Investments, New York City

Who We Talked To: Mike Venuto, Chief Investment Officer and Co-founder

Portfolio AUM: Firm’s assets under management is $78 million as of end of April; the portfolio AUM is commingled.

Primary Goal: The Toroso Neutral Allocation Strategy strives to outpace inflation by providing a consistent absolute return with limited volatility. The main goal of the strategy is to preserve wealth as a core allocation during the accumulation and distribution phases of an investor’s life cycle.

What sets this strategy apart is its approach. Toroso’s “investing glide path” is different from traditional modern portfolio theory risk-based allocations. The firm uses goals-based portfolios, targeting each individual client’s time horizon and risk tolerance with various combinations of asset allocations. The three primary investor goals include growth, income and wealth preservation.

Methodology: The strategy uses a combination of alternative asset allocation and in-depth fundamental ETF selection. The asset allocation is based on Harry Browne’s permanent portfolio allocation, “which has historically provided returns of about 8% with one-third of the volatility of U.S. equities.”

The allocation is predicated on equal weighting of four asset classes—25% per asset class: equities; commodities and other alternatives; cash equivalents; and bonds that “thrive in one of four possible economic environments: prosperity, inflation, recession and deflation.”

The second component of the portfolio construction is in-depth fundamental ETF selection. Toroso uses only ETFs, and tries to find themes that provide excess returns relative to the core benchmarks that represent each asset category. Toroso evaluates passive ETF ownership, smart-beta cost and active share, valuations, index construction and growth metrics.

Target Client: The strategy is available to institutional investors and as a managed account on a variety of platforms, including Schwab, TD Ameritrade and certain Pershing platforms. The strategy is designed for individuals or financial advisors looking to preserve wealth and compound returns. Generally, this is not a total portfolio solution, but rather a core component to complement additional growth or income strategies.

Asset Allocation Breakdown:

25% Equities

25% Bonds

25% Cash/Cash equivalents

25% Commodities/Alternatives

All ETFs? Yes

Portfolio Holdings:

Prosperity 25%

BioShares Biotechnology Clinical Trials Fund (BBC)

Oppenheimer Mid Cap Revenue ETF (RWK | C-79)

Vanguard Total Stock Market Index Fund (VTI | A-100)

VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV)

Recession 25%

Guggenheim Enhanced Short Duration ETF (GSY | B)

iShares 1-3 Year Treasury Bond ETF (SHY | A-97)

Inflation 25%

AdvisorShares Gartman Gold/EURO ETF (GEUR | D)

SPDR Gold Trust (GLD | A-100)

Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI | F-41)

Deflation 25%

iShares Core U.S. Aggregate Bond ETF (AGG | A-98)

PowerShares Build America Bond Portfolio (BAB | B-61)

iShares 7-10 Year Treasury Bond ETF (IEF | A-55)

Fees: ETF average total expense ratio is 0.23%

The Toroso management fee is determined based on the platform or custodian the client selects or that their advisor uses. The maximum fee for a direct client is 1.00%. Generally, the fee for a dual contract through a wealth advisor is 0.35%, and the fee for a retirement-advisor-supported 401(k) plan is 0.40%.

Performance (YTD or 1 Year): Year-to-date net-of-fee performance through May 31 is 3.87%

Source: ETF

New ETFs Offer Unique Gold Exposure

Published on

The Rex Shares gold-hedged ETFs—new to market this month—attempt to solve a common asset allocation problem many advisors face: What to do about gold?

Most advisors today feel like they must own gold. Most do so because gold offers diversification and portfolio hedging benefits. It can even prove useful for short-term tactical purposes, such as when the need arises for a safe haven in times of turbulent market action.

But as an asset, gold doesn’t generate any type of earnings yield that compounds, or any type of income. For that reason, many advisors struggle with tying up capital in gold at the expense of other assets. An allocation to gold means a smaller allocation to something else.

For example, in a 60/40 portfolio, if an investor decides on a 5% gold allocation, that would most likely result in a 55/40 portfolio split between equities and fixed income and a 5% gold piece. The allocation to gold usually comes out of equities due to a common volatility pairing—you sell equities and buy gold.

No Sacrifices

This is where the REX Gold Hedged S&P 500 (GHS) and the REX Gold Hedged FTSE Emerging Markets ETF (GHE) come in. They are designed to offer investors the ability to own exposure to gold without having to sacrifice asset allocation.

The actively managed funds invest in equity exposure via stocks or ETFs representative of the equity indexes incorporated into their benchmarks—the S&P 500 or the FTSE Emerging Index, respectively—and they use gold futures to create a gold hedge.

In simple terms, the funds allocate a notional value to the gold exposure that is equal to the value of the equity portion of the benchmark.

To Mike Venuto, co-founder and chief investment officer of New York-based Toroso Investments, these ETFs are the latest example of the ETF structure democratizing hedge fund strategies so that they are accessible to investors everywhere.

“I am a big fan of the innovation they have created with these funds,” Venuto, who recently wrote about different ways of owning gold, told “This structure is similar to what WisdomTree did with the WisdomTree Japan Hedged Equity (DXJ | B-65)—a $100 investment results in $100 of Japanese equities and $100 of long dollars versus yen. With GHS, a $100 investment results in $100 of S&P 500 exposure and $100 of gold exposure.”

For that reason, by design, the exposure GHS offers could not be replicated by owning, say, the SPDR S&P 500 (SPY | A-98) and the iShares Gold Trust (IAU | B-100), because $100 in those positions would result in $50 of S&P 500 and $50 of gold, Venuto says.

“GHS uses a form of leverage to theoretically remove the dollar exposure from equities and place that currency exposure into gold,” he added.

Indirect Exposure

If you think of gold as a currency, most investors get exposure to currencies through their foreign equity allocation. It’s an indirect exposure. But there’s no way to access gold indirectly, because gold is not the currency of any one country. These ETFs allow investors to be long gold while staying fully invested in the market—it’s a manufactured way to get indirect exposure to gold without giving up allocation to any other asset.

This type of access has many applications in portfolio construction, Venuto says.

In the case of GHS, it represents “a smart-beta version of the S&P 500 because it helps to mitigate a factor that is not thought of in most models, which is the diminishing purchasing power of currency,” he noted.

“I also like the intelligent use of leverage on two very different assets that avoids the volatility decay inherent in most leveraged ETFs,” Venuto said. “Ray Dalio, who runs Bridgewater, one of the world’s largest hedge funds, often speaks about owning gold to mitigate currency risk.”

“REX has made this trade available to the average investor,” he added.

GHS comes with an expense ratio of 0.48%, and GHE charges 0.65%.

Contact Cinthia Murphy at



Older ETF Dividend Strategies Are Fading

By David Dziekanski
Toroso Investments
Published in

Allocators and investors in the smart-beta ETFs are arguably acknowledging that active and rules-based strategies offer more dynamic solutions for the current global investment environment.

Flows in these vehicles have increased significantly this year. When choosing a smart-beta fund, many allocators have used similar evaluation approaches as they would in the actively managed mutual fund space. In this world, fees and performance are key. We believe there is a lot to be desired with this approach.

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101 ETF Investing Tips from the Experts by ETF Reference – Mike Venuto Chosen to be one of the Experts

ETF Reference surveyed 57 ETF investing experts, including Toroso Investments’s Michael Venuto, in search of the best tips for exchange-traded fund investors. Following are Michael’s tips:

Continue reading “101 ETF Investing Tips from the Experts by ETF Reference – Mike Venuto Chosen to be one of the Experts”

These Gold ETFs Offer Smart New Ways To Invest — Quotes Mike Venuto on

Published in Investor’s Business Daily

Gold bugs cheered the metal’s sharp rise in October, as an interest rate hike this year looks less and less likely. For gold ETF investors, Wednesday brought some gloom as the Fed’s latest policy statement left interest rates unchanged but took on a more hawkish tone.

But no matter the price swings in the short term, Michael Venuto, CIO of Toroso Investments, isn’t giving up on gold anytime soon.

Continue reading “These Gold ETFs Offer Smart New Ways To Invest — Quotes Mike Venuto on”

3 Smart Beta Ways To Own Gold

By Mike Venuto
Toroso Investments
Published in

Gold may be the most controversial hard commodity investment available in today’s

It’s important to remember that a little over a decade ago, purchasing this asset in an investment account was very difficult. In November 2004, the SPDR Gold Shares (GLD | A-100) was launched, and for the first time, investors could easily allocate directly to gold.

The merits of a gold position in a portfolio in today’s uncertain market are obviously debatable. However, investors that choose exposure to gold have many new opportunities to tilt and possibly enhance this exposure. These tilts are similar to how “smart beta” equity strategies enrich the exposures of traditional market-cap-weighted products.

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All Investors Are Long Volatility, But There’s Help by Mike Venuto on

By Michael Venuto
Toroso Investments
Published in

Over the past few years, there has been a lot of discussion about volatility as an asset class. The recent turmoil in the market has reignited this debate.

In my opinion, volatility is not an asset class; rather, it’s a market factor that all investors are inherently long. Factors are idiosyncratic risk that traditional index investors inadvertently accept. Assets are tangible; they can grow and compound value.

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