We got a chance to talk with the CEO of PureFunds, Andrew Chanin, at the 2017 Inside ETFs conference. Mr. Chanin shared his expertise on technology ETFs and overall ETF industry trends. Below, you’ll find his story and the reasons why PureFunds has unique ETF products that no other issuer is offering.
This is a follow-up after the last time we spoke, where we discuss PureFunds’ drone and gaming ETFs. You can read the full Q&A here.
ETFdb.com: Please tell us a little bit about yourself and the trajectory that led you to become the CEO of PureFunds.
Andrew Chanin (A.C.): I really had the fortune right out of school of getting a job working for the largest ETF specialist firm on the floor of the American Stock Exchange at the time. In 2007 in Florida, the American Stock Exchange is where all the ETFs were. It was this really incredible experience being at the front line of ETF innovation. Not only was it trading, understanding and reading a hundred prospectuses, and learning how they tick, who is involved and most importantly pricing them as a market maker, but also seeing the ideas that were coming out. People would approach us saying, do you want to seed this fund? Do you think this is going to work? What other things should we do for it?
So I got this viewpoint from one of the most important roles in the entire ETF ecosystem, which is the market maker because they keep the spreads tight. If they understand it and are comfortable with the product, they can be more aggressive and tighter in their spreads, which ultimately gives better trading and liquidity for investors. So that was an interesting insight from my background that was helpful in the way that we developed some of our products. But really we were seeing the ideas that were coming out, and I was learning. Because there are so many ideas that aren’t out there that I know investors want exposure to, but they just haven’t been brought out in an ETF product yet.
I had given many ideas to ETF issuers and they had launched many of them. Some of them are still out there today and very successful products for the issuers. Eventually they said, why do you keep on giving us ideas instead of launching your own? That was really when the lightbulb went off, and I knew that I could do it. I said, let’s figure out how to do this.
Having read all of the prospectuses and everything, and knowing how they all tick and whatnot, it was much easier to get involved. So it was really fortuitous to have been the first role where I was where we were given the ability to sink or swim. But you learn the product, you do the work. You show up early, you leave late. It was great education and experience that I don’t know if I could have gotten at any other company anywhere.
PureFunds Technology ETFs
ETFdb.com: Your PureFunds ETFs mostly focus on technology-related niche topics, such as drones and video games. No one else is doing that kind of thing. So what are the reasons you’re focusing on such niche interesting fields and technologies?
A.C.: For me I don’t see them as niche; I see them as being formatic opportunities. Some of these are emerging growth technologies. Some of them are in more established industries, like the video game industry. More money was spent on video game technology in 2015 than on cyber security. That tells a couple of stories:
- Maybe we’re not spending enough on cyber security.
- But also, this is a huge industry. How can you say this is a small thing when $100 billion a year is being spent on this?
I had some reservations at first. Then when I started really looking into it and understanding it I said, “Wow, this is so much bigger than I ever imagined.” Then you look at what’s going on with the technologies that are being built for it. You’re looking at eSports, and you’re looking at entire leagues and competitions for competitive sports. People are getting scholarships to go to college for graphic design, and they’re getting scholarships because they are good at playing video games. This is a megatrend that we’re seeing.
How does someone get involved in investing in something when they say this seems like it’s in a really exciting technology and I want to get exposure? Well, you can invest in individual company names, or you can invest in a broad-based sector fund. Before we were bringing out these funds, those were really only your two options to get exposure to those spaces. Especially in these earlier technologies, there’s a lot of company risk. There’s a lot of potential volatility. You don’t know who the winner is going to be, you don’t know if that company is going to succeed, if somebody else is going to do something better than them, if they’re even ever going to be able to figure out the technology that they’re trying to figure out. So we’ve found a way through these ETFs to bridge that gap. Some of that is looking for specifically these exposures because they think: “More money is going to be spent on these going forward” or “These are going to outperform other areas.”
Cyber security… do I think there are going to be fewer cyber attacks, or do I think there’s going to be more being spent on cyber security? Do I think all of that money is going to go to FireEye (FEYE) or Symantec (SYMC)? I don’t know. Someone else may come up with a better solution. Is some hacker going to figure out a way to bypass these amazing solutions from some of these companies, and make their technology obsolete? It’s very tough to say. But this is a way that you can reduce your company-specific risk – by diversifying and getting global exposure to companies from around the world that are doing different things. So we’d like to see this as we’re actually providing new exposures for investors that may want to invest in these areas, and we’re providing them with a new, innovative way to do it. So I think we’re doing an interesting service for the industry.
While people do want to invest in these, we’re offering them another alternative. When you look at our funds you’ll notice there’s very little overlap with other funds that are out there. So we believe that if we’re coming forward with something we’re not just putting a fancy name on it, and calling it whatever the hot buzzword is of the day. We’re really examining these themes, looking out and saying, “Do we believe these have long-term growth, emerging growth opportunities?”
Are we going to see video games in the classroom, and augmented reality, virtual reality in healthcare, and fitness, and simulation, and training? Or do we think it’s something that they’re going to figure out, and then something else is going to replace it?
For us it’s really about looking at these themes, thinking about, “Do these have long legs to them, do people actually want to invest in these themes and are they already getting that exposure in another way?” If there is an opportunity there because people aren’t getting those exposures, that’s something where we want to be in the marketplace.
If you’re interested in more ETFs in the Technology Equities ETFdb.com category, click here.
ETFdb.com: Speaking of being in the marketplace, and all these interesting themes for your ETFs you mentioned. I’m not sure if you’re really allowed to mention anything like this, but are there any future product in the works?
A.C.: Nothing we’re filing at the moment. It’s funny you say that, also there’s nothing out there where I say I want to get this out there immediately before somebody else does. With a lot of these products there’s this: if we don’t get this out, someone else is going to realize how good of an idea this is, and they may beat us to market. We’re not a copycat firm. Some companies may be happy saying, “This company had success with that, let’s do the same thing.” We find it refreshing that we’re providing new, innovative opportunities for people. I think that’s why people come to us to look for ideas for their own investing needs.
Silver Miners Outperform in 2016
ETFdb.com: Let’s step away from the tech-related ETFs. The PureFunds ISE Junior Silver ETF has done tremendously well in 2016. It’s the best performing, non-leveraged ETF of 2016. So can you tell us what led to such great performance, and how this ETF beat all other non-leveraged ETFs in the market?
A.C.: We were coming off of a five-year bear market in precious metals. Gold, platinum, palladium, silver… nothing was really spared over that time period. So we saw the price of these explorer companies going down. One thing that it led to is difficulties in actually getting financing. If you want to bring a mine into production as an explorer, you may need to raise some more money. If you’re in a difficult financing environment, it’s tough to get that necessary capital to expand your business.
So at the same time, you add many of these large producing silver companies that were depleting their reserves, producing silver for very little profits, or even at a loss at some of these mining companies. What happens when you’ve been producing silver for five years at a loss? All of a sudden you start running out of your reserves. So what do these companies look for? Either they can try to go out and explore for new properties, or they can try to acquire some of these junior names. Many of these junior companies could become in play in that type of environment. I think the biggest driver is seeing the massive spread of negative interest rates around the world. I think at one point we were at $14 or so trillion. We were definitely over $10 trillion in negative yielding debt instruments. To me, that is a terrifying sign of what’s going on.
But for a precious metals investor who for years had been getting ridiculed by other investors who were saying, “Why would you invest in something that yields zero?” All of a sudden something that yields zero is a better yield than saying that yield is a negative rate. So all of a sudden that argument for not investing in precious metals became a reason for some people to start investing in precious metals. So I think that was a really big driver, and I think a lot of people started looking at that. When you look at silver you typically compare it to gold. But when you look at gold, most gold that gets mined gets turned into gold jewelry, bars or coins, and thrown in a vault.
Silver has many of the same properties as gold – it gets used in jewelry, coins and bars – but it also has tremendous industrial uses. About 2/3 of all silver that is produced annually goes into these industrial purposes. Silver as a metal is the best conductor of heat of all metals, the best conductor of electricity of all metals, one of the most reflective substances on the planet. It is also antibacterial, so it’s very important in the healthcare space. So it’s one of these things where if gold does well, they are typically correlated. Silver typically trades at a higher beta than gold though, which is why we weren’t necessarily surprised that when metals had a pretty strong year our fund, which is maybe a high beta way for people to get exposure to the price of metals, happened to do as well as it did.
So I think that there are many reasons, but there are also two-fold reasons for demand for silver. It’s this investment demand, where people that are saying versus the negative interest rate, maybe I want some precious metals, and silver is cheaper than gold so maybe we’ll get some here. Also, the industrial demand. So there’s new demand for solar panels, there are new technologies that are discovered using silver. Silver is a very efficient metal for its conductive properties. Most other metals could be an inferior substitute for it.
As you get more nano, and devices get smaller, you need to become more efficient. Therefore, there could be other uses for silver and technology going forward. The last thing was, another big indicator that people look at when investing in the precious metal space, between gold and silver is the gold-silver ratio, which is really just the gold price divided by the silver price, which tells you how many ounces of silver it takes to buy an ounce of gold. We saw it get over the 80 to 1 mark early last year. That’s really when we started to see precious metals start to take up interest.
ETFdb.com: What has the ratio been, historically?
A.C.: It depends on how far back you want to go. In certain times in ancient Egypt, silver was more valuable than gold because silver was much rarer in that region. Now 20 to 1 for the 1800s. In the early 1900s that number may be 50. It’s tough to say what that number is, it depends on your range. It has been over 80 before. But over 80 is typically when things start getting more to silver’s benefit.
Investing Industry Trends
ETFdb.com: Now I want to talk more about the ETF industry as well, or in general the investing industry actually. We’ve seen a lot of capital going from active to passive investments. About one trillion in 2016, according to data from the Investment Company Institute. Why do you think that is and do you see this trend continuing?
A.C.: I think in all financial markets you see ebbs and flows. One typically outperforms, and another is a detriment, but I don’t think that’s necessarily always there. I think if everyone was invested passively there would be a lot more active opportunities. I think one of the neat things about the products that we provide is we empower investors to have an active tilt. All of our funds are passive. But if they want to say, “We think this specific industry may outperform, and we want to be overweight here,” we’re providing those tools through our funds. So I don’t know if it will keep on extending that way, but the more you go down that passive route where if you got to that 100%, all of a sudden more active opportunities emerge.
If everyone was in passive you’d probably have some widely owned throughout many ETFs. Popular names would all get bought up through these passive strategies, and maybe some of these names would be overvalued. So it’s tough to say how far this trend could go, but at a certain point, it wouldn’t be surprising to see it snap back. A huge part of that has been from performance. A lot of active managers haven’t necessarily been able to prove their fees. In an environment where it has been tougher, it’s not surprising to see money go to these cheaper passive strategies. But when active managers can start proving their worth again I think you’ll see healthy investors pick up that interest again.
ETFdb.com: What are the top three most important trends you’re seeing in the ETF space?
A.C.: Smart Beta just really took off. Some of the guys that were early to the space shut down earlier. The guys that got the timing right, I think it has been a really interesting area. It’s a portfolio tool that people are using. It’s not necessarily an area that we’re going to compete in.
Fee compression is another trend. Everyone is going down. Maybe it’s for securities lending, that’s helping them make enough money. I don’t think investors understand those practices enough, and they probably should.
Third, a lot of new faces, a lot of new companies and new products that you’re seeing here, at least at the event this year. But for a new issuer, without an existing asset management base with a lot of relationships, I think it’s getting tougher and tougher because the hurdles to get on the platforms are getting tougher as well. So you really need to knock it out of the park, out of the gate, I think, nowadays to be able to build an entire brand around the company. So I think although we’re seeing more entrants, it’s becoming more and more competitive to succeed and to distinguish yourself from the pack.
ETFdb.com: You mentioned Smart Beta as being one of the trends. Everyone is talking about Smart Beta at the Inside ETFs conference. Where do you see the Smart Beta space headed in the future?
A.C.: I think the interesting thing is we’re going to see more model portfolio strategists start to implement them. People will start dipping their toes in the water. Last year was the big year for Smart Beta when we saw massive inflows. But model portfolio strategies have an incredible ability to allocate significant amounts of capital into strategies. When something like Smart Beta is something that they’re getting demand for, that could be a big driver still. They were maybe a little bit slower to get interested in it. But at the same time, there’s just so many Smart Beta products.
I think you’re going to have the 90/10 rule. The ones that people like may get very popular, but there will probably be as many, if not more, failures. Because who has time to not only hear, “Hi wholesaler, why are you calling me? You’ve got a Smart Beta product. Let me see if I’ve got half an hour for you to go through all of the nuances of your product, and why I need to do that, and why it’s better than this other one that is a little bit different, but the cost is basically the same.” So you’ll probably see a lot of advisor frustration with more eschewers, and more similar products that maybe are slightly nuanced, but take significant education to understand why that strategy may or may not be the right one for you.
The Bottom Line
As discussed above, the best performing non-leveraged ETF that tracks junior silver miners in 2016 was the PureFunds ISE Junior Silver ETF (SILJ ). As Mr. Chanin stated, this ETF outperformed mainly due to negative interest rates and silver’s rally following gold. Junior silver miners generally have a higher beta, which is why they outperformed the silver bull market in 2016.