Andy Hagans sits down for an interview with ISE ETF Ventures’ Kris Monaco.
ETF Reference editor in chief Andy Hagans recently interviewed Kris Monaco, head of International Securities Exchange (ISE) ETF Ventures. Mr. Monaco is responsible for ISE’s exchange-traded product strategy and development, covering ETFs, ETNs, grantor trusts, commodity pools, and other structures. The interview was completed over email in May and June of this year.
Andy Hagans: Your article So You Want to Launch an ETF? is quite interesting in that it stresses marketing and good old-fashioned entrepreneurship for a successful ETP launch. How much of a given ETP’s success or failure is driven by the idea behind it versus simple execution?
Kris Monaco: An idea can only go so far. There needs to be a plan for how a new product will be implemented, marketed, and evolve over time. Expertise to launch the product may come from other resources as well, and that’s one of the benefits of a structure like ISE ETF Ventures.
At ISE ETF Ventures, we have the capability of developing the required index, but the skill for growing an ETP also comes from our partners like YieldShares, PureFunds, and BlueStar. Working together on product development and launch, we can pool resources, divide and conquer our areas of strength, and deliver a product that will capture the appropriate exposure to the industry and be a sensible component in an overall portfolio. When it comes to bringing an ETP to market, there needs to be some of that entrepreneurial spirit — creativity, innovation, embracing risk — to be successful.
Andy Hagans: What do you think is the minimum AUM benchmark for a sustainable ETP in each major asset class? Is this benchmark changing over time?
Kris Monaco: There is no one-size-fits-all requirement here. “Minimum” AUMs vary based on the product and what it’s designed to achieve. Though there isn’t an automatic AUM threshold that permanently validates an ETP, a general estimate would be something in the tens of millions to achieve sustainability. In order for issuers to realize success, there should be AUM goals at specific timeframes to ensure the product is reaching its goals.
Of course, as more ETPs enter the space, the more competitive it becomes to get shelf space. The proliferation of ETPs has undoubtedly been a boon for the investor, though; extra competition offers more choices, compressed fees, and overall value. Successes and failures will keep the industry balanced and in check over time and organically establish equilibrium.
Andy Hagans: I would guess you have seen no shortage of pitches from would-be ETF/ETP issuers seeking financial backing. What do you evaluate when these ideas come across your desk? What makes you confident that a firm is going to be successful in making a late entry into a crowded space?
Kris Monaco: I look at these ideas as if I’m the investor. How would this fit in a portfolio? Is there a need for this type of product? Is this solving a particular problem? That’s really the first level of evaluation.
The previous work of the issuer is important, too, and so is their business plan. Is this product addressing a market need, or is it something completely new? Is the business plan simple and clear, or is it overly complicated? If it’s the latter, and there’s a vague focus for the ETP, it won’t get our backing.
We back the funds we do for a specific reason: we believe in the opportunity for the ETP, and we believe in the issuer’s capabilities. Our due diligence is on our proposed partner as much as it is on the investment theme itself. We invest in good people, and from good people come good products.
Regarding the second question, I’m not convinced that it’s too late to enter the industry. When you compare ETPs to other investments, they’re the new kids on the block. Listed equities have been trading for centuries. The first mutual fund was established in the 1920s, and it’s been argued that commodities trading has been around for thousands of years. The continued surges of available ETPs and inflows are a testament that the industry is still young and growing. Many opportunities for success remain.
Andy Hagans: As the ETFs now launching is increasingly complex, constructing the underlying indexes would seem to be a bit more challenging. You’re not just taking the largest 500 companies listed in a country but rather coming up with rules-based ways to filter potential constituents. When presented with a good idea, how do you go about coming up with a viable index? Have you seen good ideas for products for which creating an underlying index simply wasn’t feasible?
Kris Monaco: Every index is different, but there is a big difference between just creating an index and commercializing an investment idea. In the end, an index is just a number, but what we’re trying to do at ISE ETF Ventures is build investable indexes with purpose. Our goal is to enable the creation of complementary products based on the same underlying index concept. We are not just trying to create a single value.
Oftentimes, we’ll conceive a compelling investment idea, but that idea may not be replicable in the form of an index. That could happen because certain financial instruments don’t exist, there aren’t enough securities to compile an investable portfolio, etc. Some indexes have incubation periods that take years until the time is right.
Andy Hagans: You’ve been in the ETF business for a significant part of its history. What’s surprised you about the way ETFs have evolved? Any bold predictions for the future?
Kris Monaco: I am always amazed by the flexibility of the various ETP wrappers. Almost every asset class in the world can be securitized by ETPs, making them available to investors of all types. In the U.S. alone, there are millions of securities accounts that can easily trade ETPs, so the distribution potential is enormous. In the end, investors enjoy broad access, deep liquidity, transparency, and low fees. ETPs will continue to revolutionize the investment management industry, all to the benefit of investors.