Digitization in the brokerage business is shrewd – Motif investing is closing

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

MOTIF Investing, one of the earliest innovators in the digital investing space in the US, is shutting down. Apparently, the communication hasn’t been that great, as some advisors found out from a tweet. Motif portfolios will be moved over to Folio Investing that has been competing with Motif.

At Daily Fintech we started covering Motif as early as 2014. The company is 10yrs old and its retail arm `Motif Investing` allowed DIY investors to invest in customized thematic portfolios for $9.95. It was not a social trading platform. It was a regulated broker-dealer in the US whose product offering was low cost but active, as individuals could change weights in each Motif.

In mid 2017, I had picked and covered the `Digital Dollars` Motif that had a 30% one year performance. It was an example of a thematic, fully transparent and customizable motif, with a fintech focus. In that post I was comparing alternative structured product offering exposure to the same thematic.

`What is more important is that Motif offers an optimization algo that allows users to take stocks that can be considered players in the mobile payments space (which are 26 US listed stocks) and optimize (holdings and weights). This is a great tool for DIY thematic investing.` excerpt from my 2017 post

 Motif Capital was the other part of the Motif business launched in 2016 as an investment advisor of all institutional dealings. Through that business, Goldman Sachs had a partnership with Motif, which created in 2019 thematic indices and ETFs, the Goldman Sachs Motif Next Wave of Innovation ETFs.

Screen Shot 2020-04-20 at 09.58.20 

In 2015, Motif had also struck a unique deal with JP Morgan, through which it would offer Pre-IPO access to retail. A strategic investment happened but unfortunately, the market never saw anything actually happen.

Motif was clearly a fascinating early innovator. They even added direct indexing, fractional investing capabilities, and a growing offering with ESG thematics. Seems like they were doing everything right.

They were backed by Goldman Sachs, JP Morgan, the UK based VC is Balderton Capital and the Chinese social network company Renren Inc.

Screen Shot 2020-04-20 at 10.06.16

Source: Crunchbase

Motif had raised $126million over the past 10yrs. When I spoke to them in 2016, they were already concerned about a Chinese copycat site MotifInvesting.net that had launched with the same even dashboard. And of course, about being leapfrogged by incumbents.

Fast forward to today, and the Robinhood effect killed them.

Folio Investing (a 20yr player) had already `copied` Motif Investing with their Ready-to-Go-Folios and a much cheaper price. Motif had to fold its business and investors using the unlimited plan will be getting a very similar offering with a 30% lower subscription.

`Investors will be transferred to a Folio Investing Unlimited plan by May 20 and charged $19.95 per month, a discounted fee from the usual $29 negotiated by Motif. ` Source

The sentiment in most online media is one of sadness, as an innovator is killed or stopped because of the price wars. WealthManagement reported that As of late March, Motif Investing’s wholly-owned subsidiary, Motif Capital Management, had $868 million in assets under management, according to regulatory filings.

Motif`s data-driven business that was behind the customized indices and the white papers around investment themes, will also suffer from this sad event.

The vision that Motif had to expand to China, the birthplace of Techfin, will not become reality.

The brokerage business is in danger to stop innovating, simply because commissions have gone to zero and the Schwab`s of the world have caught up with fractional ownership offerings, direct indexing, low cost financial advice and more.

Some say that Motif never found a product market fit. I say, that Motif was in the low-cost active space during a time that low cost passive outperformed. And it was not bought out 3-4 yrs ago from a large broker, like Interactive Brokers bought Covestor in 2015.

Notes: InvestorJunkie review of the Folio investing product and pricing

New readers can see 3 free articles before getting the Daily Fintech paywall. After that you will need to become a member for just US$143 a year (= $0.39 per day) and get all our fresh content and our archives and participate in our forum.

The post Digitization in the brokerage business is shrewd – Motif investing is closing appeared first on Daily Fintech.

`NonTransparent ETFs` one step forward and two steps backward

pros cons

The `NonTransparent ETF` wrapper caught my attention recently, while reviewing WealthManagement news and trends. What kind of innovative investment vehicle would choose in our times, this kind of name?

In late January this year, the SEC approved a new ETF wrapper and several companies will be able to launch active ETFs or license the wrapper to asset managers. T. Rowe had first applied for SEC approval to launch actively managed ETFs (what is now called `NonTransparent ETFs`) as early as 2013.

Undoubtedly, the growth of low cost, indexing, passive ETFs has been supported by digital innovations in wealth management. However, it is the incumbents that own the lion`s share of the low cost, passive ETF market. Similarly, it is predominantly incumbents that will be launching NonTransparent ETFs.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. 

You get 3 free articles on Daily Fintech. Get all our fresh content and our archives and participate in our forum, by becoming a member for just US$143 a year.

NonTransparent ETFs are actively managed ETFs that offer all the advantages of the ETF wrapper – digital access, intraday liquidity, tax efficiencies, ect – for actively managed portfolios. The reason that they have been called `NonTransparent ETF` is that the managers are not disclosing their holdings on a daily basis but on a quarterly basis. The ETF manager will only disclose real-time his-her positions to the Authorised Participant that is the entity who provides the in-kind redemption process.

Eaton Vance has been the only company that already has an approved wrapper, the NextShares, which is an actively managed open-end fund trading on exchanges without regularly disclosing its holdings. ETMFs were launched in 2016 but the growth has been negligible.

Eaton Vance Stock NextShares (EVSTC) – $6mill AUM

Eaton Vance TABS 5-to-15 Year Laddered Municipal Bond NextShares (EVLMC) – $7mil AUM

Precidian received approval in Spring 2019, for their own proprietary NonTransparent ETF structure, the `ActiveShares` which can also be licensed.

In this recent approval, Blue Tractor a 5 year old company also received approval to license its proprietary model, Shielded Alpha, to asset managers who are interested to launch NonTransparent ETFs.

Actively managed ETFs

Actively managed ETFs already exist but they are no more than 2% of the entire ETF sector. They have predominantly been focused on fixed income which is an asset class that the portfolio holdings are not easily replicable. Most asset managers have had difficulties beating their benchmarks and at the same time offering low cost investment vehicles (even in funds) which has resulted in very low interest in equity actively managed ETFs.

As most opportunities in equities have been in smaller caps rather than larger caps and in international markets rather than US domestic markets, actively managed ETFs in larger-cap domestic caps seem challenging.

The NonTransparent ETFs that have been approved maybe (just maybe) will establish themselves especially as investment ingredients that financial advisors embrace. The question is whether financial advisors will stomach the opaqueness of these ETFs. I guess they would if the alpha produced is sufficient but that of course, is a chicken and egg problem.

The only example of fully Transparent Actively managed equity ETFs is the family of ETFs launched by ARKInvest, which I have covered from their early days.

The investment thesis of ARKInvest is Innovation. It offers five actively managed thematic ETFs whose holdings are fully transparent (with a small intraday reporting delay). ARKK is the largest ETF with $1.86billion AUM (Total assets under management for all five ETFs are just over $3billion)

Screen Shot 2020-02-17 at 10.51.14

ARK was awarded by Fund Intelligence in 2019, the ETF Suite of the Year. Cathy Wood, the CEO, has also been disruptive in the way research is conducted at ARKInvest. They have developed an Open Research process that allows them to go beyond the traditional financial analysis by including Theme Developers and experts and holding open debates around their investment themes. More here.

Two picks of noteworthy innovations of ARKInvest ETFs.

  • In the Fall of 2015 ARKW ETF, was the first ETF that invested in Bitcoin through Grayscale’s Bitcoin Investment Trust. I personally remember reading Chris Burniske`s (research lead at the time at ARKInvest) ARKInvest research at the time which was shared openly and led to their investment decision. The ARK Web x.0 ETF (ARKW) listed on NYSE Arca invests in  innovative internet technologies including cloud computing, big data, digital media, e-commerce, bitcoin and blockchain technologies, and IoT.

 

  • Currenrly, ARKInvest shares openly on their website and on the Github their valuation model of Tesla which is a core holding in three of their five ETFs. Tesla’s Potential Trajectory During the Next Five Years is their latest thinking around Tesla`s potential and the actual model with its inputs is on the github here.

 

The post `NonTransparent ETFs` one step forward and two steps backward appeared first on Daily Fintech.

High-quality Low-cost, Active Index investing

`Jack` Bogle passed away this past January. No matter what investment camp you belong to, he has undoubtedly impacted investment thinking, products, and services.

Last summer, Victor Hagahni and James White – Victor is the Founder and CIO of Elm Partners, and James is Elm’s CEO – wrote an article Is Vanguard More Rolls Royce, or Hyundai? that highlights an investment world particularity:

With most products and services – cars, doctors, food etc – better quality normally goes hand-in-hand with a higher price. Not so with investing.

They even quoted Bill McNabb, former CEO of the Vanguard Group saying:

`The whole cost argument from an investment perspective is counter-intuitive.` 

Listening to Bill McNabb`s short interview[1] at the 2019 Academic and Practitioner Symposium on Mutual Funds and ETFs, he makes a very important point that is not well understood.

Over the past ten years, we have transformed the investment management space into

A low-cost product space

It is NOT a transformation into

A passive beats active space

The growth of robo-advisory (apologies for the umbrella term) is Not about passive over active. Robo-advisory is about the widespread use of low-cost products. We live in a world that it is becoming more difficult to imagine high-cost investment products.

One of the best examples of low cost, active and passive management, is Elm Partners. 12bps, tax harvesting, portfolio construction based on economic fundamentals and other liquid risk premia in addition to equity market Beta.

Listen to Victor Hagahni and James White discuss with me their approach which is for accredited investors only. Their offering includes less than half a dozen investment programs and the possibility of SMAs. Elm Partners does not aim to do everything for everybody. Low cost and transparency, are paramount for their business.



You can also follow their quarterly reporting on Seeking Alpha, here. You can follow their thoughtful research here. You can savor Victor`s TEDx Talk Where are all the Billionaires? & Why should We Care?: where he uses the puzzle of the missing billionaires to help us understand why most investors fail to capture the returns offered by the market. This actually leads into the main reasoning for Elm Partners investment strategy, the so-called “Active Index Investing.”

[1] Former Chairman and CEO of Vanguard, Bill McNabb Discusses the Future of the Investment Industry from the 2019 Academic and Practitioner Symposium on Mutual Funds and ETFs. Presented by UVA Darden and the Investment Company Institute. https://www.youtube.com/watch?v=Z8UQvkKbFZo

Book one hour with Efi – Ask me anything (AMA) for 0.10BTC – Efi@dailyfintech.com

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email