Investors want income. And many also want to create impact with their investment dollars. Sometimes those two efforts align. In the spirit of Veterans Day, we connected with Academy Asset Management’s CIO Seth Rosenthal to look more closely at the Academy Veteran Impact ETF (VETZ ), which generates income through mortgage-backed securities and loans while creating impact on the military veteran community.
VETZ is a one-of-a-kind ETF that invests in government-backed mortgage-backed securities and small business loans to U.S. service members and their families. Tell us how veteran lending is a unique investment opportunity.
Seth Rosenthal: VETZ allows investors to gain exposure to agency-backed, mortgage-backed and asset- backed securities. The strategy is benchmarked against the Bloomberg MBS Index. It has a low-risk profile, and it delivers impact to veterans while providing market-based returns.
If you think about the underlying assets on the small business side, according to the Small Business Association, veterans own over 2 million small businesses and employ over 5.5 million people. That’s a huge impact to the economy. Veterans want to start their own businesses. However, access to capital is the biggest challenge.
On the residential side, access to VA mortgages is really important, because it makes housing more affordable to active duty, especially in high-cost areas such as San Diego and Washington, DC. VA mortgages allow a borrowing up to 100% of the home value, and also have lower borrowing costs than traditional mortgages.
Default risk is one of the biggest risks to MBS investments. How should we think about risks in veteran lending, especially given the current rate cycle and potential mortgage refinancing?
Rosenthal: In VETZ, the underlying assets carry government risk because both the VA mortgages and the small business loans have the backing of the full faith and credit of the U.S. government. As you correctly highlight here as it relates to mortgage-backed securities, there’s prepayment risk.
But we’re in a different environment than we were in previous cycles. Given the amount of homeowners that had mortgages at 4% or less, by our estimates, there’s about 70% of the mortgage universe that has about a 200 basis point cushion before we see a significant refinancing wave. While prepayment is a risk, we think that there’s mitigating factors to prepayments in the cycle.
Let’s talk about the macro outlook. Headed into 2025, there are calls for possible reflation as well as for additional interest rate cuts. Will it be a challenging year for fixed income investors? What’s your outlook for the market, and specifically for veteran loans?
Rosenthal: There’s definitely a mixed view out there. From our standpoint, given the pullback we’ve seen leading up to the election and then after the election, the amount of Fed cuts that have been pulled out of the market is warranted. In our view, bringing down that last mile of inflation is going to be a bit challenging for the Fed. But the fears that inflation is going to be heating up may be a bit overblown. That’s a function of concerns around fiscal spending, tariffs and other things. But we see some mitigating circumstances here.
First, on fiscal spending, we’ve seen the red wave. But at the end of the day, we just don’t see a blank-check policy. We’re getting a sense that there are going to be limits in terms of the amount of spending. Obviously, it’s likely to go up, but it’s not a blank check.
Second, while there are likely to be increased tariffs, we aren’t concerned that it’s going to have a material impact. Trump is a negotiator, so when you negotiate something, you’re not going to put your best offer out first. Tariffs are a bargaining chip, because we know they would have consequences for the U.S. economy if they’re too high. At the same time, we see a deflationary impact on the oil policy of the incoming administration. We’ll see an increase in oil drilling, we’ll put a cap on oil prices, and that could help bring inflation down.
Overall, the risk of inflation heating up materially is overblown. And when we think about the mortgage market, mortgage rates are extremely high. We don’t see a ton of housing activity coming down the pipeline, but we’ll be watching.
From an implementation perspective, appetite for income-generating strategies has been big and growing across traditional and alternative strategies. How are advisors and investors implementing VETZ? Any anecdotal examples or data you can share?
Rosenthal: I’d say a couple of different things. First, earlier this week it was announced that Betterment included us in their Social Impact Portfolio. We’re excited about that, and it tells us that folks are interested in delivering impact.
The other thing is we talk about delivering impact without concession. We see advisors that have existing mortgage-backed and asset-backed exposure, and they’re looking for an alternative. You can deliver impact without concession. They’re replacing our strategy with maybe some other nonimpact mortgage-backed strategies.
The third thing is advisors that just see value in mortgage-backed as an asset class, especially when you compare it to others in the fixed income space. We’ve seen corporate spreads tighten to levels that we haven’t seen since 2005. The question is, how much more can they tighten, and how much can they participate in terms of further tightening? But mortgage-backed spreads have not participated to the same degree. At the end of the day, it’s an asset class that has some upside in terms of spread tightening.
Question: Let’s dig a little deeper into impact. Academy donates a portion of its subadvisory fee for military-veteran supporting groups and charities. Tell us more.
Rosenthal: We’ve committed to donating a portion of the management fees to veteran- and military- related charities. Last November, we announced a partnership with the Bob Woodruff Foundation to help facilitate the distribution there. They do tremendous work for the veteran community, and we’re extremely proud to be partnered with them.
Academy defines itself as “mission-driven.” One of the unique things about the firm is its geopolitical expertise. How does that expertise inform your investment approach?
Rosenthal: We have nearly 30 retired admirals and generals on what we call our Geopolitical Intelligence Group, or GIG. These folks have their finger on the pulse around all things. They have unique subject matter insights, like regional expertise from the Middle East to Asia Pacific.
We also have experts on artificial intelligence and cybersecurity. Given where we are geopolitically, this is a unique resource that provides tremendous value across the board. It also provides value to help us shape our investment thesis, whether it be around inflation or other matters. And it’s also something that we put in front of clients and advisors because the temperature around geopolitics is not going down, and the interest amongst all of us is growing. We’re in a unique position to provide that expertise.
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