At the Inside ETFs 2016 conference, we had the chance to chat with Nick Cherney, senior vice president and head of exchange-traded products at Janus Capital Group and co-founder of VelocityShares. In our meeting, we discussed Janus Capital’s ETFs, Cherney’s market views, and insights from the conference.
ETF Database (ETFdb): Please tell us about yourself and about the trajectory that lead you to becoming the head of ETPs at Janus Capital?
Nick Cherney (NC): I started out at BGI out in San Francisco on the institutional equity side. That evolved over time into the iShares business. Then in 2007, I went to Barclays Capital to help launch the iPath effort, which were the first ETNs in the U.S. In 2009, we started VelocityShares with the idea of catering to institutional traders, which was an underserved market at the time. I think it’s still an underserved market to some extent. We built the firm from then up until today primarily on the basis of helping active managers and traders develop systematic strategies using our products. That evolved into a 40 percent market share in the VIX® product space, and we have a broad offering in the commodity space as well providing leveraged products on gold, silver, oil and natural gas.
The evolution to Janus, which was a little over a year ago now, was really about taking our expertise and what we do in terms of developing specific exchange-traded products, and trying to leverage the existing expertise of Janus and their legacy as an active manager, to really go after the space in a thoughtful way. The old ETF story, I think, was very much focused on active versus passive, low fees, and the inability of active managers to outperform. I think our products, while they’re for short-term trading, are clearly not about that story. VelocityShares is a distinct brand from Janus, but both product sets are about helping investors try to generate alpha.
But I think we have an opportunity to create products that attempt to create outperformance, whether it’s through the product construction itself, with enhanced-beta products, or actively managed products, or at Velocity, which is helping people manage portfolios through their own active management. Our mission at Janus in the exchange-traded product business is to build out three areas of products: tactical trading products under the VelocityShares brand, what we call “enhanced-beta products” across Janus’ broad range of capabilities, and then also eventually our actively managed ETFs.
ETFdb: You were talking about leveraging Janus expertise. What would you say now that you’re on the Janus team? What is the overall strategy?
NC: As it relates to the two categories of enhanced-beta and active products, we’ve spent the last year really going through the integration process, gaining understanding of what the capabilities are. Our core business at Janus has historically been growth equities in high-concentration, high-conviction portfolios. But we also have a deep and growing business in fundamental fixed income. With Bill Gross joining the team, and the acquisition of Kapstream, we have a large global macro fixed-income team.
We own Intech, which is a large quantitative manager, and we have our adaptive allocation products under Myron Scholes. So we have this very broad group. The objective is to figure out how we can leverage those groups for actively managed products, or extract some of the insights and value that they have to build enhanced-beta products so we’re not operating in a vacuum. We want products built on a foundation of solid, fundamental active management. Lastly of course, we do have the capability for index-based products that we’ve been doing and still work with.
ETFdb: Two of Janus Capital’s ETFs, the Janus Velocity Volatility Hedged Large Cap ETF (SPXH ) and the Janus Velocity Tail Risk Hedged Large Cap ETF (TRSK ), have innovative volatility strategies. What are you trying to accomplish/what are the advantages of using the VIX futures for the fund’s volatility strategy?
NC: As I mentioned, we have in our VIX exchange-traded products about 40 percent market share. We have the largest VIX-based exchange-traded product out there. And we spend a lot of time working with traders and active managers to develop volatility strategies to help them reach their objectives; whether it’s managing risk, generating alpha, what have you. And back in 2011, we developed a series of our own proprietary strategies that we thought were the best way to tackle the space in a systematic way. Really, what most clients are looking for in volatility is risk management and downside protection. You can do that through traditional option-based strategies, and depending on what your objectives are that might be an appropriate way to go.
But our belief is certainly that VIX futures provide a unique avenue to manage the core difficulty of these types of strategies, which is the trade off between downside protection and upside participation.
In other words, can you hedge the portfolio in a way that doesn’t detract from returns so dramatically during bull markets that you overwhelm the benefit of the hedging strategy? The reason we have two different products is really for two different objectives. SPXH is meant to be a core equity holding, where the objective over multiple market cycles is to outperform an unhedged position, and do that through a balanced approach to mitigating downside risk versus upside capture. So if you can significantly reduce the draw down but still retain your upside capture, then over time, because you’re starting from such a higher base on the back end of these market dislocations, you can potentially outperform.
TRSK we view as sitting in that alternatives bucket. We compare it to the HFRI quite frequently and look at it as a low-correlated asset that can sit alongside your traditional stock and bond portfolio to help moderate the overall risk of the portfolio and hopefully increase the long-term returns.
ETFdb: There has been a lot of volatility this year. The first week of 2016 was one of the worst weeks ever. Do you believe that ETFs with hedged or low-volatility strategies will beat the market this year? What is your view?
NC: I can speak to our products. Obviously there’s a wide range of products out there. Our products are definitely designed to outperform in market downturns. Both SPXH and TRSK are outperforming the S&P 500 pretty significantly year to date. Our core belief of how we’ve built our products is based on the idea that extreme market moves are the ones you need to focus on. Whether it’s extreme declines or major bull markets, you need to focus on both of those tail events, both the left- and the right-hand tail, because that’s what drives long-term returns.
These sorts of moderate-return environments, plus or minus five percent, though they happen more frequently, are not the environments that matter if you look at long-term compounded returns.
Most of the long-term return impact is coming from the worst days dragging portfolios down, or the best days really driving the portfolio up. Our products are designed to profit in those kinds of environment on a relative basis. Obviously I don’t get into the business of predicting where markets will go.
We’ve definitely seen increased volatility. We’ve been talking about that for the last few years and we’re expecting that to continue. Should markets really correct severely, we would expect our products to outperform.
And similarly, if they should rally very strongly, we would expect strong performance relative to our competitors. Where products like ours can struggle is in an environment like we had last year when there is a decent amount of market volatility but really no directionality. We didn’t see major corrections. The market was basically flat over the course of the year. We continually retraced the same levels almost every month for the entire year. And in a directionless market like that, while it’s emotionally difficult for investors, the reality is that those conditions don’t really affect your long-term portfolio value. We have intentionally designed our products to not focus on that sort of environment and really shine in the large bull markets or bear markets.
ETFdb: Who should invest in your products? In other words, what kind of investor should hold these ETFs?
N.C: SPXH and TRSK are designed as core, long-term, asset-allocation products for anybody who has exposure to either alternatives or large-cap equities. Our leveraged and inverse products under the VelocityShares brand are obviously targeting a smaller subset of the market and really focused on sophisticated investors who are prepared and understand managing daily trading risks.
The whole idea of SPXH and TRSK was to say we spent a lot of time with institutional clients and helped them develop these sophisticated strategies. But it requires a relatively deep knowledge of the market, pretty active engagement with your portfolio, and risk management almost on a daily basis. Then we provide some of the same value that people are getting out of those products in a more packaged solution, in a buy-and-hold product that somebody can make an asset allocation to and have that daily trading activity taken care of for them. So I think SPXH and TRSK have a place in most any diversified portfolio where the investor has an allocation to equities and is looking to reduce some of the equity risk.
ETFdb: What are some of the insights from the conference so far?
NC: I would say that the obvious trends generally out there in the industry is one, the enhanced beta space. I think that that is where the future growth for new products is going to come from: well designed products that have some promise to outperform their benchmark over time but in a lower-cost structure that ETFs offer.
The other one which is huge, and that I think will continue to be an issue, is the need for increased investor education around the trading of ETFs, what happens in these market dislocations, why they can keep comfortably using the products even in times of stress. To me, those are the two big things out there in the industry.