Northern Trust’s Abner on Distributing Ladders

ETFs being a large part of that. In addition, ten thousand Americans are reaching retirement daily while trillions sit in retirement accounts, and we're also seeing growing demand for predictable income and outcome oriented solutions as retirement accelerates. So to help us unpack what this means for active management inside the ETF rapper, we're joined by Dave Abner, who's head of Global ETFs and Funds at Northern Trust Asset Management.

as well right now. So it's in a way I've kind of gone back, Like I learned about mutual funds as an investor early on, but then I got very into ETFs, and everything I learned about mutual funds over the last few years was really through the lens of ETFs, and now I oversee both businesses. So it's really been it's been a great learning experience, and it's given me, you know, a lot of ability to think about where active belongs in each wrapper. And I really don't I'm

sort of I'm kind of product or wrap. I like to say, I'm rapper agnostic. Right. When investors come to our set Northern, we first start and we think about like what are they trying to achieve? What outcome are they trying to you know, generate, and then we think about what is the most appropriate wrapper to achieve that outcome? Right, So that's that's so you know from my seat whether

you want to buy a mutual funder a ETF. If we think it's the right investment vehicle for you to get that outcome in, we're happy to you know, deliver it. Right Then, when I go beyond that, if I do I think active belongs more appropriately in one wrapper or another. No, I don't, I really don't. I think I think you

have to. It's less about the rapper and it's more about the requirements of the strategy itself, right, Like, you don't want the rapper to be a constraint if I think about ETFs, and most CTFs have a need for daily transparency, if that will constrain the strategy, we may be better off launching the strategy in a mutual fund. So there's sort of a list of things that I think about regarding rappers when we're thinking about which way

to wrap people rap rap strategies. For the most part, nowadays, I mean people are coming to us and really asking for the ETF rapper investors, right advisors in particular, they just you know, ETFs have I think we're sort of hitting that hockey stick moment. I'm sure we'll talk about it and demand is like they're you know, they're they're sort of uh, they're the desired vehicle sometimes even if it's not the right rapper, but they still want an ETF.

the core active products Northern Trust has historically offered. Yeah, I noticed you got the flex shares on the vest on and you know, the legacy funds like DU and R you know, what the lessons from their performance and you know, like investor reception kind of inform your active product roadmap today.

we'll be merging the Flexhair's brand into Northern Trust. We'll change any of the ETFs, but it'll be easier for us to have conversations like this because it'll be one brand. It will be the Northern Their Trust ETFs. I think we've changed the business has changed its view, partially because there's new new leadership meet coming in, but also partially because the industry changed dramatically, right, Like sixty eleven really changed everything for active ETFs. You really they really were

not uh easy to do. We actually we actually have two active ETFs, R A v I and B n DC and those were launched under our flex Shares brand years ago. Those are the only active ETFs we have. Actually, Gunner is an index based ETF. But when we launched those, we were we were thinking the only way to bring these strategies to market in an ETF rapper was active, right.

There was no way to really index size them. But now if you think about what sixty eleven did, it changed what you can really bring in the active rapper. So you see today and then we'll talk about some of our new funds and distributing ladders are active ETFs.

In general, this this sort of renaissance of active. And you know this, like five or seven years ago, we were talking about the death of active, right, like active is dead, passive is growing, and now you're seeing and I think it's a result of sixty to eleven this sort of what people are calling the rebirth of the renaissance of active. And again it gets back to that sort of can you bring the strategy to market? And

what are you trying to give to investors. I really think what you can do with active ETFs today is enabling this renaissance. But it's not the same active that we used to know. And to me, that's important, right, Like we used to talk about active and it was like Peter Lynch or you know, any of the legends

of active investing. Today active means something very different. Like it's like, can we use the active rapper to bring a strategy to market for investors that maybe even sort of not active the way you think about it, but as not tracking an index, And that's that differentiating piece, Like it's it's really it's become complicated, I think for investors in a lot of ways.

their passive bucket and they have their active bucket. And even for you know, for Northern when we sell our quality low volatility strategy, for example, it's an index based product. But if we go to many of the gatekeepers on the street, even though it tracks an index, since it's not one of the poor indexes that they think of like an S and P or a Russell one, they think of it as active. Right, And there's been this debate going on forever and so, but you have advisors.

So when you go to advisors and when you're trying to sell the product, some advisors say, oh, it's an index based product. I analyze it with my index funds, and it goes in bucket AY, and therefore it goes to this research aalysts and others will say, well, it's not it's not the rustle one. It's based on a proprietary index, quantitative index. It goes in bucket B and it goes to my active analyst. Right. I actually thinks that's sort of like creating confusion for no reason. Right.

What we should be doing is, let's look at this strategy. Let's ignore this active passive because the lines have become so blurred, and let's see what the risk adjusted returns look like based on what we're trying to achieve, and what do they look like post tax, which is becoming more and more important and need to have structure. As you see sort of multiple strategies that look alike, they're

doing the same things. The high income funds are important here, but they all have different you know, depending on how you trade the options or what you're doing, you're gonna have different tax treatment on the funds, so you need to think about that as well. So my view from here is like to get back to your question, like I think we should sort of decrease the value of this assessment of whether it's active and passive and elevate the importance of risk adjustion returns and post tax outcomes,

like what's really being delivered. That's kind of the way I think about that.

way of indexing. It's really like many people think of it as an active overlay on a traditional index, right, And then we decided that smart beta was getting crowded, and we started calling it modern alpha, right, which which harkened back to the days of active managers generating real, true alpha, and we called it modern alpha because that's

what systems are doing today. Like, it is really hard for advisors, you know, you want to try and sort of get past the marketing, right, That's that's where I go with that answer that I was giving you, is like you got to get past all the marketing, and even today like financial services, there are some some like leaders of marketing that have become big providers of money management services in financial services, right, and it is hard

for advisors. Look, advisors are on board, they love it, but it's hard for them to really distinguish what's going on in the strategies that are underneath all this marketing. You know.

And then all of these new things keep coming out, new ways to provide I think of ETFs as being able to even provide bespoke solutions forstors in all of these different ways that we couldn't do before. So when we think about distributing ladders to me, it goes a little bit back to my roots. Have you ever heard of the fire movement?

more power around investing. So when you think about this concept of what I noticed with fire investors is one of the things they do is they use websites like tips ladders, for example, and they go out and they plug in what they want to achieve, and tips ladders spits out a list of say they want to twenty you know, they have a thirty year time horizon. They want a thirty year ladder. Tips ladders tip kicks out like a thirty different bonds or forty five different bonds

that you'd have to buy to build this ladder. And there are some investors that are actually going out there and slogging through it. And I always thought, wow, this is a complicated way to manage money. And then I got to Northern and I learned about our wealth business and our wealth businesses something that I think of as unique in the industry, we practice something called goals based investing right where we take an investor and we don't start with Okay, you've got all this money, here's how

we're going to invest it. We start with this concept of Okay, you've got all this money. Why did you go out and why did you get all this Why don'd you work so hard and generate all this money? What do you want to do with it? Right? What

are your goals? And when you start to think about money in those terms, then you realize, well, I want to send my kids to college, and I have always wanted to give back, So I want to spend one hundred thousand dollars a year and give back to my favorite charity, you know, over the next ten years or something like that. And I looked at it, and we looked at that that sort of concept, and we married it to this idea that you can do lots of

different things in active ETFs. Can't we bring it together and make it easier for investor to manage their money towards goals. That's exactly what distributing ladders are. So if you think about a traditional ladder, either when you build it on your own or when you build it in an ETF, it's perpetual. Generally, when you buy it in an ETF, it's perpetual. So you buy the ladder, the first year matures, and then they buy the next farthest out year, right, and the ladder just goes on forever.

And if you want to use that money for something, you have to go make a sale, and that sale, depending on what's underneath and what's happening, you could generate a gain. It's complicated, you have to remember when to do it, you have to figure out what to do. And we looked at this and we were like, well, we can marry the flexibility of an active ETF structure with this concept that people don't just want their money

invested forever. Sometimes they want to use it for their goals, and we could give it back to them in a tax efficient way. And this is not easy, right, Like, this is sort of blasphemy in the fund world that you want to launch a fund that actually wind up at some point in time. Right, our five year distributing ladder product will wind up in five years because we'll have given you all your money back, right, And that was that's a hard concept for some people to get around.

But for investors, they're like, hey, wait a minute, that's exactly what I need. Hypothetically, if I have like a million dollars and I want to give away one hundred every year, you'll just give me my one hundred back, you know, and I invest a million over next ten years, You'll give me one hundred back each year. I don't have to do anything. I don't have to potentially create gains, I don't have to pay commissions on sales. Whatever it is.

You give it back to me and as a return of capital, and I can use it for my goal. I can give it to my charity things like that. This was just sort of it just struck right, and it's actually it struck us as like why doesn't this exist? Why don't investors have this yet. It's it's been a little slower for investors to understand that, and they're really the pickup is the interest is really interesting, but it's hard for people to understand, you know, they have to

get their heads around how it works. Sorry, that was a long answer, David, I apologize that.

Is that is like our unwritten code of what the investor wants and what we want to deliver, and that's where we start. Then we use the active piece only in as much as we're trying to generate as much yield in each of the rungs that we can, again while not sacrificing at all that concept that our primary stewardship goal is returning a piece of the capital to investors,

whatever ten are they are on each year. So for us, it's like the strategy is active because within each of the rungs, within the parameters that we set out of the bonds that we will invest in We have some flexibility, but our primary goal is maintaining and ensuring that when you invest in these products, you get your capital back

first and foremost. You may give up ten basis points for that because capital return is our priority, but it's we think it's worthwhile and at the same time, we're trying to get you as much yield as we possibly can.

sixty two, I'm retiring at seventy two. I need an income over the next ten years until I can start taking Social Security. I've got this million dollars. If I spend one hundred grand a year. So we give them a ten year product. You think about a ten year distributing ladder, It'll give them one hundred grand each year to spend. That's more important, right If we showed up in year ten and said, you know, we're only we've only got sixty thousand dollars left. So this year that

Alaska cruise you were thinking about. Sorry, you got to mix that, right, Like, if you want us to have that conversation with your wife, we can, but you know it's I know it's going to be a hard one, right. We never want to be in that position. Right, So they're not asking us, they're not at the end of that year saying, oh, how come I only generated ten

BIPs versus fifteen dips in my interest. What they're thanking us for is the fact that we securely stewarded their capital through the process and help them achieve their goals. That's way more important, right, That's you know, that's what goals based investing is all about. I actually think it's like, you know, it's something out you can go back to it. It's something I had internalized as a person for years.

Like when I got back to when I got into the ETF industry many, you know, nineteen ninety eight, and when I really got my head around ETFs, it was roughly two thousand and I was like, yeah, like these makes sense when I leave the office. I was working at bear Stearns at the time. I'm an investor, and investors deserve you know, fair deals, transparency, lower fees. And that was really what got me hooked on ets back then.

And we're still on this and now we're just using the structure to give people better and better products to help them manage their financial lives. That's the way I think of these.

I look at the percentage of managers upperforming. And one of the things I noticed last quarter, and you know, just last year in general, active bond managers really struggled than in past, and so you know, there's some debate of whether alpha opportunities are as available as they were you know, years ago. How do you adjust risk appetite versus I guess income adjectives. How do you think about that?

say outdated technologically for many years. And I actually think that fixing co ETFs are driving automation in the fix income space. And it's still the fix income space is complicated, right, But every day that automation becomes more prevalent, the systems can do more of the work and it becomes harder and harder for active managers those those real you know, a bond selector to add anything over what the systems can do. I saw I read an interesting article this

past week. It was talking about how AI can replicate almost seventy percent of what active managers can do, and yeah, so it's pretty crazy. I was thinking about it this way, and this is like a very simple example in my

head of like how do I think about that? So you have five stocks, and you have an active manager, and you have an AI, and the AI and the active manager on four of those stocks, they basically will pick the same four stocks because the whatever the active manager is using, whatever system it was, it can be replicated by AI. Whatever numbers that active manager was doing, it can be figured out by AI, and therefore it can replicate roughly eighty percent seventy or eighty percent of

that fifth stock. This is really I was trying. I was like, what is it about that fifth stock and what it is about that fifth selection? That piece of active management in my mind, and a lot of people are gonna hate me for this is I think the active manager gets up, it's a sunny, warm day and that fifth stock that was close to being included in the system and that the AI would never include because

it's only a computer. The active manager feels generous that day and they're like, you know what, we're gonna put this fifth stock in or it's been sixteen inches of snow like we're more used to nowadays, and they're like, there is no way that stock is almost there. But I'm not doing it. They're not getting it right, Like, that component of active management is something that will never be replicated exactly by the machines by AI. I think.

So there's always a piece, but it gets smaller and smaller every year, right like, And that's what's happening here. And I think that even as the as we continue to automate the fix inc of markets and we have better analysis and we have you know, it's going to be tougher and tougher to do that, and in order to generate sort of what you think of as alpha returns, you're gonna have to increase your risk appetite to try

and take those risks. And I think that's a for the most part, what you're seeing is it's not a good trade off for investors. Really.

run out and go replicate them themselves. I mean, don't they realize people have jobs to do. They have to go be teachers, and they have to build buildings, and they don't have time to go doing replicating portfolios. All they want is a fair trade, right, Like they want

a fair shot. So I thought that was a sort of a red herring, right, And I think advisors are saying that with their dollars that they investor right now, transparency is key, right, Like that's what's driving And I think if you go back to eight or you sort of look at what's happening now with private equity valuations, right, transparency is always key. I never believed in non transparent active ETFs. I don't think there was a I didn't

think there was a solution for them. There's a you know, there's a diminism dominimous amount of capital invested in them because there's always somebody somewhere that wants to invest that way. But really it's deminimous in terms of the whole ETF boom. And I think the future is all about this sort of transparency and the sort of investors just like I say, they're smarter or they have more access and they just want to know what they're getting. I think it's a key to investing today.

You know, what other are you seeing is kind of like active adoption gaps that your team is looking to address.

And I you know, without somebody trying to launch non transparent active ETFs, we might not be here today where we are with the growth of active ETFs, right, Like, all these things push us forward, right like we are, you know, we're building the bedrock of the investment products of the future. I think we actually launched a set of index products at the same time as disturbing lads

focused on the muni market. And the muni market is like those indexes are so complicated and big, right Like, this is a market where you could potentially like it seemed right that there should be a set of core indexes, right like your go to indexes in the muni market that are priced extremely reasonable and things like that. And then the next step is that for those that want to go out there and really pursue a higher yield

in that space. I could see some more active strategies even in that space coming online in the future, right Like, I think the tax advantages of those funds are critical for you know, probably the most important thing for investors are after tax returns, like I say, so, taxes are becoming a bigger and bigger bite out of your portfolio

all the time. So I think the community space is actually ripe for a lot more sort of in the in the area of active even beyond what we've built with the with the indexes as your core portfolios be interesting to watch.

We weren't, you know, we didn't have all of the complications of traditional asset managers. Right if you think about you know, big asset managers, they're selling direct indexing, they're selling SMAs, they're selling mutual funds and ETFs. There's so much internal conflict around what they have to do. I thought of wisdom try as like a technological solution to that. We do one thing, we do it well and it's

a technology. I was blown away when I moved on to a firm like Gemini, Like they took like startup technology to a new degree that I hadn't experienced before.

It was really a tech firm of the business arm and all of it was you know, one of the things I was focusing on even in the crypto space early on before before we got approval for the cryptoetfs, was bringing crypto ETFs to market, right, and it was marrying the technology that we had at Gemini to to custody and clear crypto to the ETF structure that I understood really well and we were held being you know, provide that back end to investors. And now today we

see it as well. Like I think of what we're doing on the ETF side and what we're building at Northern Trust, we're like like building, it's almost like a small technology unit within the firm where we really push the limits. I mean, if you think about distribution, we use so much technology in our distribution on the building

of products. When we think about when we thought about building the distributing ladders, right, like, how are we going to manage you know, if you think about like thirty year ladders of munis and tips, it is a technological sort of work of art that we can manage those funds in all sizes, providing inter day transparency and liquidity for investors. This is like it's complicated, and we're making

it easier for investors. So yeah, it's like I feel like my career through these places has always been stepping stone and utilizing each piece, have sort of leaned on it to figure out where we're going to go next. I think that's what's been happening. That's been great. Look, I'm really I've been so lucky, right, thirty years in financial services, mostly in New York. It's been an amazing experience. I can't you know, I can't be thankful enough. Really,

I appreciate it, thank you for sharing. Unfortunately we do have to end here, but Thank you, Dave. I really enjoyed this discussion.