Arrow aims to jump into alternatives ETF sector
Entering mostly uncharted waters; 'not an easy place to be fishing for assets'
Arrow Investment Advisors, a fledgling fund company founded by a former Rydex SGI executive, plans to launch a suite of exchange-traded funds that use alternative strategies.
Arrow, which has $1.8 billion in assets under management, has mutual funds and also subadvises five exchange-traded funds for Alps Advisors Inc. The firm does have exemptive relief from the Securities and Exchange Commission to launch its own passively managed ETFs, said chief executive Joseph J. Barrato.
Even though Mr. Barrato and six other employees at Arrow have ETF experience from their time at Rydex, the firm decided to start out with mutual funds because the operational costs to gain traction in the market is lower, Mr. Barrato said. He estimated that the break-even point for the firm to introduce mutual funds was $50 million, while it will be $100 million to $150 million for ETFs. Arrow has five mutual funds, all of which alternative strategies.
But now, the firm sees an opportunity to take some of its alternative expertise and launch ETFs that are not correlated to the equity markets, Mr. Barrato said. Alternative investments make up less than 2% of the ETF universe. But the asset class is becoming more important for retail financial advisers, he said.
“In institutional circles, alternatives make up 15% to 20% of portfolios, but mainstream America still doesn’t have exposure to ETFs,” he said.
The firm expects to launch its alternative ETFs and a few commodities-based exchange-traded notes by year-end.
Currently, only 42 exchange-traded products use alternative strategies — representing $3.6 billion in assets under management, said Dave Nadig, director of research at IndexUniverse.com. “It’s not an easy place to be fishing for new assets,” Mr. Nadig said. “People are going to wait to see how they perform before investing in them.”
Given that many of Arrow’s staff has expertise in this area from their days at Rydex, the firm may have a first-mover advantage — depending on what they come out with, said Paul Justice, an ETF analyst.
“Rydex missed an opportunity to do this because they had a strong suite of alternative mutual funds” but their ETFs employ different strategies, he said. “Arrow could have an advantage over them if they come out with products soon.”
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