A US investment adviser is launching its debut exchange traded fund range with more than $1bn in the bag after its existing investors jumped at the chance to switch to ETFs.
The sum, which most new entrants to the sector can only dream of and which the company claims is a record, is the latest sign of the growing popularity of the ETF structure, often at the expense of more traditional vehicles such as mutual funds.
Chadd Mason, chief executive of The Cabana Group, a registered investment adviser that is the parent company of Cabana Asset Management, said investors holding about 75-80 per cent of the $1.5bn it looks after in the existing range of target drawdown separately managed accounts had chosen to switch to the new ETF format.
Mr Mason said the catalyst for the move was recent legislation in the US that has paved the way for semi-transparent and non-transparent ETFs, which do not have to disclose their holdings daily, letting active managers protect their trading strategies and preventing hedge funds from front-running trades or stealing managers’ “secret sauce”.
“We will apply for semi-transparent [status]. Being able to protect your proprietary IP and protect the reporting of your positions, that is the way the industry is going. You don’t want people going in and stealing your models,” Mr Mason said.
The inherent tax advantages of ETFs in the US, particularly their ability to minimise capital gains tax, are an additional factor behind the move — one that should benefit end investors.
“We are a big believer that ETFs are the future,” said Mr Mason, citing their greater transparency and liquidity, relative to mutual funds. An ETF structure should also facilitate distribution in the broker dealer sector, he added.
Arkansas-based Cabana Asset Management’s five rules-based multi-asset “target drawdown” ETFs will aim to limit peak-to-trough declines by anything from 16 per cent (for the most aggressive of the ETFs) to just 5 per cent (for the most conservatively managed).
Cabana’s existing SMAs already invest via a series of third-party ETFs, a structure that will be maintained in the ETF format. The new structure will avoid two layers of fees by waiving charges for the underlying ETFs and instead charging just for the top-level ETFs, which have net expense ratios of about 0.68 per cent.