Hector McNeil on mastering ETFs

Hector McNeil has helped shape the exchange-traded fund (ETF) industry by building successful companies including ETF Securities, Boost ETP and WisdomTree Europe.

In 2017, he and business partner Nik Bienkowski set up HANetf (named after Hector And Nik) — Europe’s first white-label ETF platform. This provides operational, regulatory, distribution and marketing services for asset managers to launch and manage ETFs that follow a set of regulations known as Undertakings for Collective Investment in Transferable Securities (UCITS).

Despite the coronavirus pandemic, HANetf’s assets under management (AUM) have soared from just under $70m to $630m this year. Opto sat down with McNeil to discuss why ETFs are in vogue with everyone from fund managers and investors to fans of delicatessens, and even his mum.

 

What led to you and Nik launching HANetf?

In the early 2000s, I worked at the Dublin office of the US market making business Susquehanna, setting up their ETF desk. It gave me a good grounding and allowed me to see the coming opportunity.

I then joined ETF Securities, introducing gold and oil ETFs and taking it from zero to $30bn. Then in 2011, Nik and I set up Boost ETP, with a focus on short and leveraged equity exchange-traded products (ETPs).

They were like the ugly cousin in the loft because of the high fees and stigma around leverage. But we ended up with about $1bn of assets before we did a joint venture with WisdomTree in 2014. We exited in 2017, and then spent some time in Starbucks scratching our heads before setting up HANetf that same year.

 

What does HANetf focus on, and why is it different from other offerings?

We felt that more and more asset managers would be looking to add ETF wrappers to their offerings. But if you are going to set up an ETF organically it takes two or three years just to get to the start line and costs up to $10m. Instead of that, we provide the spades and shovels such as strategic distribution agreements with wealth managers and trading platforms, and listings in Germany, the UK, Italy, and Switzerland. With this plumbing and a team with over 200 years of combined ETF experience, we can have an ETF out for a client in 10 weeks.

Our vision is to be the first global multi-manager ETF platform with 200 ETFs across 30 managers, covering the whole periodic table of ETFs from equities to bonds and alternatives. It’s more in the delicatessen end of the market, so not cheap beta, but more active, smart beta and thematic. We won’t be Walmart where you can turn up and buy an ordinary box of strawberries. We are the Whole Foods of ETFs — lower competition, added value, higher content and IP.

“We won’t be Walmart where you can turn up and buy an ordinary box of strawberries. We are the Whole Foods of ETFs — lower competition, added value, higher content and IP”

 

Where is the business now, three years in?

We are in the hockey-stick phase of growth. We have nine clients and 11 funds, including the EMQQ Emerging Markets Internet and Ecommerce ETF; asset manager GinsGlobal’s cloud technology and medical innovation ETF; a gold exchange-traded commodity marking the Royal Mint’s first-ever investment product; a Kuwait & Middle East Financial Investment Company ETF, KUW8, focused on Kuwaiti equities; and the Almalia Sanlam Active Shariah Global Equity ETF.

We’re seeing good growth in all of them to date, with EMQQ returns up over 50% this year.

 

Are the ETFs mainly passive or active?

The Sanlam ETF, which is a global equity fund with a Shariah screen, is our first active product. We have three more in the pipeline.

Everyone conflates ETFs with passive investing, but in the US over the last year, since the US Securities & Exchange Commission gave the go-ahead to non-transparent active ETFs, there has been massive growth.

That gold rush is something you’ll see replicated here. We want to get ahead of that, and we are already seeing huge interest from active fund managers.

“Everyone conflates ETFs with passive investing, but in the US over the last year, since the US Securities & Exchange Commission gave the go-ahead to non-transparent active ETFs, there has been massive growth”

 

The EMQQ ETF has an index which supports it, but it almost works like active management as they go out and talk to clients. Most of our ETFs are bridges between typical pure beta and the active world.

The Kuwaiti ETF is the only pure passive product we have, but it is niche so falls into our skillset. Kuwait will be upgraded by the MSCI this month from frontier to emerging markets, which means billions of dollars going into the Kuwaiti equity market. ETFs are used to gain that exposure. There is no way my mum would ever buy Kuwaiti stocks individually, but she will in an ETF because they are the most democratic wrapper you can get. They are much more accessible than mutual funds.

“ETFs are used to gain that exposure. There is no way my mum would ever buy Kuwaiti stocks individually, but she will in an ETF because they are the most democratic wrapper you can get. They are much more accessible than mutual funds”

 

But aren’t investors shifting away from active investing into passive?

I agree there is a trend towards passive and that will continue to dominate because there is so much out there dressed up as active. The wishy-washy guys will be taken away, but there will always be a place for active management. If you have a gold miner and an unexpected strike develops, and the gold price spikes, then an index can’t react to that. An active manager can.

If you want environmental, social and governance (ESG) and impact investing, then again it needs that minutiae of detail an active manager can provide. Eventually, artificial intelligence might catch that up, but not yet.

 

What do you consider to be the factors driving interest in thematic ETFs?

We have ETFs focused on digital infrastructure and connectivity, medical cannabis, wellness, and Bitcoin. Thematics give you an extra surgical application in gaining exposure to long-term global trends. If you are going to buy into China or the emerging markets to take advantage of burgeoning consumer markets, then having a thematic ETF around smartphones or tech is beneficial. So many portfolios are vanilla nowadays. Thematics, even if they are only 5% of your portfolio, can offer differentiation.

“If you are going to buy into China or the emerging markets to take advantage of burgeoning consumer markets, then having a thematic ETF around smartphones or tech is beneficial. So many portfolios are vanilla nowadays. Thematics, even if they are only 5% of your portfolio, can offer differentiation”

 

What does the future hold for HANetf?

We are aiming for 10 new ETFs a year, and in five years we will be between $5bn and $10bn of AUM.

We are also interested in model portfolios, which in the US has been one of the biggest ETF growth factors.

How does my mum choose from 5,000 ETFs in the market? She needs a middleman saying this is the balanced ETF portfolio and this is the aggressive one. The iShares of this world do this already, but for in-house products. I want to be a multi-manager provider of a model portfolio with a top-10 player for each exposure. That would be powerful. That would give us elbow room in the market.