Lee Kranefuss launched iShares in 2000, when there were a mere 40 ETFs. Now, there are over 6,000 ETFs globally, according to BlackRock estimates. And while Kranefuss no longer works at iShares, he’s trying to help advisors make sense of the growing choices in the ETF world. His newest company, 55 Capital, debuted five portfolios on Monday that invest solely in ETFs. The ETF managed portfolios will initially be offered in Separately Managed Accounts.
“There are so many ETFs today that many advisors find it overwhelming to try and choose between them,” Kranefuss said, in an interview with WealthManagement.com. “What I hear from advisors when I talk to them is, they spend a lot of their time increasingly on wealth management, tax planning, things like that. We can provide a core building block so they’re not trying to figure out, ‘What 30 ETFs would I buy?’ or ‘What would be a couple ETF strategies to implement?’”
Kranefuss believes his team can take some of the technical aspects of using ETFs off advisors’ plates, so they have more time to focus on things like tax, succession and estate planning.
The five new strategies use a risk-based approach, as opposed to a return forecast one. They include Dynamic Macro, the firm’s flagship strategy that dynamically allocates across and within equities, fixed income, absolute return, commodities and currencies; Enhanced Macro, which has a fixed allocation to equity, bonds and alternatives and also dynamically allocates within each asset class; Global Allocation, which dynamically allocates between three equity and three fixed-income asset classes; Global Equity, which provides exposure to U.S., developed and emerging markets equity; and Alternatives, which provides a substitute for bonds using absolute return, commodities and currencies.
The idea is to provide the types of strategies that institutions have been using for a long time—but with lower costs and low minimums. The fees range from 40 to 100 basis points depending on how tactical the portfolio is, and minimums are $250,000 for the base strategy and $500,000 for the fully dynamic strategy, Kranefuss said.
“These sorts of strategies of a broadly diversified portfolio with active risk management have long been done in the hedge fund world but with very high minimums and very high fees,” Kranefuss said. “You typically had to use swaps and other derivatives to do it. Today you can do this and get 95 percent or more of the benefits with ETFs. The challenge is, you really need a research staff; you really need scale to do it.”
The ETF managed portfolios space has grown to 770 strategies and $76 billion in assets as of the first quarter of 2016, according to Morningstar data. This indicates that many advisors are looking for help sorting through the thousands of ETFs, some of which have conflicting claims, Kranefuss said. Many call themselves “momentum ETFs,” for example, but some don’t actually deliver that.
“In many cases what they do deliver can be put together by the right portfolio of less expensive ETFs,” Kranefuss said. “Hedge funds do this all the time; they look across the set. They don’t tend to buy many of the smart beta-type products.”
Kranefuss, who was named one of WealthManagement.com’s Ten to Watch in 2015, still serves as the chairman of Source, an ETF provider based in the U.K. He started 55 Capital earlier this year, along with co-chairman Vinay Nair, former CEO of Ada Investments and a visiting professor at the Wharton School. Bruce Lavine, former president and chief operating officer of WisdomTree, is the company’s CEO.
