Moats and Boats (and Maybe a Dragon!)

commercial in the super Ball where ahead of Dragon. So basically, you have one month to binge Game of Thrones? Can you get through all of them? See? This is the problem, this is what what what the problem with breaking bad Wiz? For me, I I get addictive, addictive personality, so I don't have the time. I got two small children. I can to go on a bingeing thing. Yeah. So with that in mind, we want to have a Game of Thrones and fired show well, but we just it just

sort of popped out. Yeah right, so moats and boats that's what we're calling this one. Yeah, this is the first time we actually built the show around just the cool sounding title. But as I thought about. I did go looking for a dragon, because dragon would have invest but we couldn't find that. There is an et F called the China Power Shares Dragon something we're gonna have to us listed China Shares anyway. I think it's called the Golden Dragons. Next time, well the investigal guy is

coming on. Okay um. But we were about to blow it off. But then I was like, you know, there's moat and there's an e t F called C which is the Global Shipping e TF. So there is moats and boats and so as I thought about this, there's been a few articles that have come out lately that have just talked about how rough and brutal the e t F environment is, which of course you know I've

talked about all the time. Barry riddholds at an article saying life is nasty, brutish and short for a new ETF, quoting Thomas Hobbs, I like to quote public Enemy I called a terror dom and e t F dot Com had this thing looking at how closures are now creeping up to new launches. In other words, Darwinism is just rearing its ugly head. It's hard to survive, but here's

two e t f s that aren't blockbusters. They're firmly sort of in the middle class, and they're both over five years old, which is the sort of age you have to live to get to to to where all the money is. The revenue in E t f s goes to E t F or five years old. But here's the thing. Of all the E t f that have closed, there's been about nine and twenty closures, the average age is three point four years. As such, most of them cannot make that fifth birthday right, a lot

of the new ones. So if you can get past that time, you don't need to be the biggest thing. Ever, there's a firm middle class about eight hundred kickers. So I looked at one that was sort of on the upper band, which is MOTE, which is two billion dollars, and one sort of on the lower band, which is c which is fifty million. So I thought, just a good episode just to drill into two E t f

s that you may or may have heard of. One's more like a strategy, like an active strategy in a way in rules baith index, and the other one is sort of like a deep really not that known industry the shipping industry. So just talk about the index design, how it's going, and how these ETFs have managed to sort of like carve out a living even though winter is coming this weekend ruins moats boats and there's going to be a surprise a dragon. Okay, we're gonna talk

about moat with Brandon Kshatsky. Got it, got it first try? Uh, he's at Vanek. Tell us about mote. Well, moat is a great investment concept. It's really leveraging morning Stars equity research process. That's really what goes into the ETF and what powers it's it's long term performance. It's been around since two thousand twelve, so well over a five year track record. Attracts an index created by morning Star two

package essentially morning Stars equity research. So there's sell side research teams the best ideas essentially, and their research is built around owned identifying great companies, companies that they believe have a sustainable competitive advantage. That's key. That's kind of step one in their research process, and that gets to the name mote exactly. It's like which these are companies that have a moat around them effective and that Buffett put that term on the map right, isn't that his

term I look for wide moat companies? Is that where it's exactly he You know, he's used the term in in annual letters. He was Fortune magazine article back in the nineties. I think might have been the first time he coined that term. So similar strategy certainly its own unique approach. So what came first the name or the E t F. Well, the beauty of this particular et F, which I mentioned has been around since two thousand twelve,

is that the idea didn't start then. Um So the research, this economic mode research has been implemented by morning Star since for over over well over a decade, almost two decades, since two thousand and two. So they have embraced the concept of identifying companies with sustainable competitive vantages since then. And then they developed an index to capture some of that equity research in in in a in a trackable index fashion. That's been around live since two thousand seven.

So this is a long, a long standing And what are some of them? You know, you've got companies across the game at mostly household names, you know, companies that get all of the headlines. You know, firms like Facebook all the way down to you know, materials companies, firms

like Caterpillar, large household names. They skewed towards large cap the excuse exkew towards established companies, those that have been able to establish those economic motes and and build competitive advantages around there, around like you're gonna get into the Caterpillar business tomorrow with Chiganic equipment. So if you go on, if you google this, uh, morning Star has a whole like fact sheet and on their process. So I have

the definitions of moats here. I guess one is high switching cost, like it costs a lot to switch to a competitor. Cost advantage. I guess you're much cheaper like Walmart. Intangible assets trademarks like Harley Davidson, and the network effect, which is firm service to become more valuable as the

user base grows. Facebook effect right, which, by the way, I looked at the performance of this, it's up a hundred thirty seven percent since it launched, which is better than the SMP, which is best contributing stock Facebook, and you'd even hold that long kind of came in and out. But Facebook was on fire for a while. So how do you guys decide what's in, what's out, and how how much turnover is there. So we talked about identifying

sustainable competitive advantage motes. That's essentially the foundation for this index. A morning Star produces more economic mote research, but they also produce valuation research. They are forecasting cash flows into the future to arrive at a current intrinsic value of a stock of a company, and the index at more from morning Star UH in a very repeatable way, takes all of those wide mote companies every quarter, looks at them and then allocates to those wide mote companies that

are most attractively priced relative to their fair value. Because in theory, that sounds like something that shouldn't turn over that much, like if you've got a got a moten that This is anti Buffett in my opinion. So while it gets tied to Buffett, this is a pretty active strategy. The turnover per years a hundred and okay, that's that's a ton. The Vanguard Total Market Index fund turns over two percent a year three percent, So this is probably as close to active as an index based et F

could possibly get. Right, Yeah, I mean that that's what's really fascinating about the strategy. It is an index strategy. It's following very transparent rules to allocate among wide mode companies on a quarterly basis. But it's leveraging morning Stars equity research process and it's a hundred plus equity research team that covers stocks globally and and without them, there isn't a strategy. So you know, it's definitely leveraging the

expertise and the reputation of morning Star equity research. But why is the why is that turnover so high? Well, that's the that that speaks to the valuation side of this investment strategy. So if you were to invest in just wide moat companies as identified by their equity research team, you know, there isn't always going to be out performance,

and in over long period of time, there isn't. If you just market cap weighted their entire universe of US wide mote companies a hundred and forty or so companies, generally speaking, you know in periods there are and periods there are not outperformance. But when you add that valuation component to the allocation process, that's where we have seen

the significant outperformance. Eric, you mentioned the out performance since the et F has been live, but if you look back to when the index went live, the Morning Star Wide Mote Focus Index, that was two thousand seven. So this is something that's been around for over ten years. It's not a back tested strategy. It's outperformed the SMP five hundred by almost four percent annually, so since that time. This isn't a factor et F per se. But it's

definitely smart data in my opinion. Um, it has a process. It's almost like an active mutual fund. It just happens to be. Everything is transparent, you can see the rules, but the rebalances are where you're hoping to pick up some uh, some return. Look, it used to have five million for a while, so it was like in the firmly in the middle class for a number of years.

Then it started out perform. Now it just hit two billions, so that's sort of breaking up into the Yeah, so uh and in a case like this, this is a kind of et F where if you're if you're trying to sell it, the out performance is key. Right. If this thing underperforms, it's just gonna be harder to get looks. It's kind of to a degree, live and die on performance, right, Yeah, yeah, certainly any any investment strategy that has something behind it

that's not just purely rules based or factor driven. You know, it's gonna have to prove itself. But you know what we've seen is, you know, while it sat in you know that what you referred to as the middle class for a while, it actually got off to a really great start. It hit a hundred million before before the

end of the first year that it was around. So in terms of the E t F industry, that's a that's a pretty good success, knowing knowing what what a lot of issuers are going through these days, and and uh, the trajectory was going upward for for quite some time. I think it hit hit a bit of a plateau asset wise whenever we saw generally speaking across the industry some outflows from the US equity funds in fifteen sixteen.

And it's continued that upward trajectory from there. And this is all despite I mean sixty five basis points is the fee it's actually nine. It's like Walmart just knocking knocking it lower. UM forty nine. You know, that's um cheaper than an active mutual fund, a little more expensive than a typical et F I think the asset weight at average GTFC has twenty one basis points. But it does show that you can have a fee over twenty or forty basis points and and carve out a living.

I mean, two billion is pretty nice. This is um a product a lot of issuers are probably jealous of. If you I think you have to justify fees in any environment, I mean, no one is immune to that. That's that's clear. Um. You know, when when you think about what you're getting through the mod E t F getting access to those one plus equity analysts, all of that research they're producing, that's a lot of intellectual property,

you know. And on top of that, if you look at the rankings and the performing it's not only relative to the broad market. Has it done well relative to its peers. It's as of January thirty one, in the morning Star Large Blend category, it is the number one performing fund on a three year basis. That's includes mutual funds, active, passive, smart, beta, whatever you whatever you might look at. So the morning

Star category, no, No, it's okay. So I got a question though, because it sounds like these morning Star people are working really hard. What are you doing? We are are are making sure that as our mandate, we're tracking the benchmark as it's as it's presented. And you know, we work very closely with morning Star. Has been a great relationship. I've been fortunate enough to be with van X since when you know, when we were developing the CTF,

working with morning started bringing this to market. So we work with the equity research scene. We have quarterly calls, quarterly webinars with that team to inform investors, make sure they know what they're getting, why they're getting it, um and we make sure that that the e t F is is running efficiently and meeting its subjective. One thing about this and about the et F structure that I think we talked about versus active is a hundred and seventy turnover a year, and yet this thing has never

had a capital gains distribution. That is almost unthinkable because in the mutual fund rapper, you'd be taxed because of that turnover. Can you talk a little bit about the structural advantage. It's very much speaks to the advantage of ets in terms of a very actively traded portfolio in the in the case of Mode, it's a US equity primarily large cap strategy lends itself to potential tax efficiency.

Nothing's guaranteed in the space. You know, there is definitely a potential that that an ETF can can spit off a capital game. But fortunately, despite the turnover in the strategy, the ability for an et F portfolio manager to work within the capital markets and and and particularly the primary markets to deliver in and out securities via via the in kind um creation redemption mechanism has has benefited the CTF. And you know, shareholders are certainly um benefiting from from

no capital games payments since it's since its inception. Now, Mote just hit two billion, and just last year, you guys did what a lot of ETFs do when they hit one to three billion. Not a lot of them, but some of them. You spawn sequels, just like the movie business. You launched Goat and Moody, Right, these were because mode successful. You're like, hey, let's let's we had a good thing going on. Let's ride this a little bit.

Um h y G did it with s h y G which is short term high yield and h y G H which is hedged, and they build little families around them. Can you talk about what Goat and mody What what are those? Yeah, so, um, it goes a little bit beyond you know, seeing a good thing going and deciding to to add to a lineup. So we've had a lot of success with Mode our US strategy, and I would imagine it's fair fairly similar for other other issuers in the marketplace. You get a lot of

feedback from clients. So we had a lot of early adopters for our US Mode strategy, a lot of very strong believers in the morning Stars methodology and their approach, and they started asking about different exposures to that investment strategy across different markets. The first iteration, the first sequel, if you will, was MODI m O T I are International and uh we had some success with with with

that particular offering. And again it's it's a combination of a a a warranted investment strategy that can work in different applications, but also client interest client deman. So what are some companies in that one? So you see any you know, companies across the gamut and internationally, anything from the London Stock Exchange all the way through to Australian companies that have have a pretty heavy heavy presence geographically

it's very diverse, you know. It's it's across Europe Asia. Um, there's a lot of casino companies actually, and how do those get weighted? These are all weighted actually on a on an equal weighted basis, all of these industries that we're talking about that underlying Moat, Moody and Goat as your reference, they're all equally weighted, which means you're gonna get a little extra zip, you know. Equal weight it means little tilt towards the smaller size companies because it

is more volatile. So that return that we've talked about does come with a little extra risk which should be noted. Um and Got, by the way, was nominated for Ticker of the Year. What is it? Um, that's what Global International us together. You know, a couple people on Twitter we were debating about this. We thought that tickers should have been reserved for something the greatest of all time. Yeah, like like I don't know what, or just off limits permanently.

But um, you're lucky, you got it's a great ticker. It's nominated for Ticker the Year at the e t F Dot Comic Words. Believe it or not, there is such a thing and uh, I think I think it has a good shot. I looked at the other ones. Oh pause, p A w Z isn't there that's a that's a strong one. Head to head there, come on, go. So when you talk to institutional investors or retail investors, how are people using it in their portfolio? We have

seen them using it in different ways. Um. There are a lot of investors that are using it as a replacement their core holding, of of their of their market cap indexes UM, so a replacement of the SMP. You know, the forrmants is compelling to a lot of these investors, and and it's it's fairly diversified. You know, there's currently I think there's forty nine components in the index in the e t F, So it's it's not like you're getting this complete concentrated bed on on on a particular

sector or particular industry by using the CTF. There's also a lot of allocators that are are complementing that exposure. So you know, there's a whole set of investors that are not going to get away from the ultra keeap market cap weighted SMP type exposure. So you you you add a little bit of a compliment to that exposure, you might allocate that that sleeve to to mote UM. But in the third way is in the actively managed space,

and we talked a little bit about that. It is more and more as we see with investors with financial advisors UM being used to replace certain actively managed slices that just over the last ten plus years unfortunately just just haven't haven't been able to meet benchmark returns within that strategy. I have a very important question, on a scale of zero to ten and being high, how big of a fan of Game of Thrones are you? I'm a I'm a pretty big fan that I'll say. I'll

say between eight and nine. I'm definitely just I'm just a show guy. Um, what do you think of Eric who literally don't knows nothing about it? Well, well, I know of the show, I'm not I don't live in a like is your Amish country or something. I just I missed. I miss these things. I missed breaking bad, I missed Game of Thrones. And then once it's like four years in, I don't have time to go and

I know I'm gonna get addicted. Do you think he can make a go at it and try and watch them all with a month to go, and that's pushing it. That is that is pushing. I'm gonna get kicked out of the house. I'm out of there, man, I can barely like squeeze in like a fifteen minute basketball game. Okay, Nick Khalibus. Uh, you're with Investco and you you've got the the C S E A E t F there, which is are metaphor for for boats in Game of Thrones. Yeah,

and let me set this up a little bit. See is the global Shipping E t F. And if you know, MOTE was the two hundred and sixty six biggest we saw it was upper middle class. C is the undreds around biggest ETF. So there's twenty two hundreds, so it's kind of right in the middle, and it's it's a survivor um. It's inception date is two thousand ten, but it actually existed before that. It's a long, quirky story about them shutting it down temporarily to get a new advisor.

But it's actually a number of years older than that. So this thing has just been around for a long time. It's got about fifty million, although it had more assets back in the day. It's had some performance struggles, but it's just a unique sort of sub industry. Uh arguably maybe a theme E t F that has just sort

of been around. So, Nick, what's the vision? I think when you're looking at SE uh, it's it's providing access to a very specific, you know, sector of the market in terms of oil and gas, transport and kind of maritime um. And so people who want that exposure can get can get it from C. I think the other thing that's very interesting about is if you look at kind of how it performs and where it operates, it

seems to have very high correlation to commodity prices. It likes rising interest rates, it likes a week dollar, and so from that avenue UM, I think one could also think about it as a little bit of an inflation heade if you are thinking about it more from the macro realm as opposed to maybe the specifics of shipping, because no matter what, this stuff's gonna get done, right,

things are going to get shipped. You got Yeah, we're we're we're in a we're in a global trading economy, and that's for sure, stuff's got to get done, got to move. How has the trade war actually affected that? You know it's it's you see it from maybe some of the cautions from a couple of the of the companies in here. I mean, I was interesting. I was reading a little bit about the largest holding, which is a P. Moeller, and they mentioned trade as as something

that was a headwind to their operation. And and so I think it's it's something that has created a certainty for the for the sector, and so I would have to term it as a negative. And if when this all gets resolved some day, I think it will will help create a little bit of a of a tail

one to this sector. So one interesting thing that I thought about the ETF is that you know, it's we're not talking about passenger transport at all, right, it's just sort of materials and product, Right, Why make that distinction? Now that that's exactly right? A matter of fact, I think if you look at the rule book from the index Provider S ANDP, it's specifically it indicates this is not transporting people. It's it's transporting kind of goods and

goods in commodity. And why why make that distinction and what why is that a benefit? Well, I think the distinction is really to make it more kind of you know, a focus on trade industry and not let it be kind of um, you know, kind of consumer discretionary and and and part of kind of the the the uh, you know, the what the world I want to say is kind of leisure and transportation type of of of sectors makes it more kind of unique and focused. And

and I'll echo that this is definitely unique. It's um, if you look at the countries, Um, you've got the US, but then Denmark is number two. You don't see Denmark in that high in many e t f s, and

then Japan, UM, South Korea, Hong Kong. But really here's the kicker, only twenty six stocks, So this is that's about as low as you'll see an E t F that's highly highly concentrated, which does I would I would guess this is probably more for a trader, not necessarily like a buy and hold investor, somebody like you said, trying to get some real targeted exposure. Yeah. I agree, it's it's more uh for somebody who's who, who's you know,

looking for exposure to the sector. And then if you if you if you want to think about it as like a substitute for for maybe an inflation hedge or something that's commodity of sensitive. You could you could you could turn it on um, you could you could position it that way in a portfolio. Two. You know what E t F came out and failed, but c survived was the global fishing E t F had similar country breakdown. UM, but that didn't make it. But again see again sometimes

he's targeted ETF. It's it's hard. Um. Can you talk a little bit about just an e t F like this just surviving over the years, um and just you know, whether it's assets and refluctuate above and below a hundred million, it's just hanging around. Yeah, what's the secret to its success?

I think it's the it's the uniqueness in the exposure and the fact that um, you know you have there's I think there's a lot of ets that have kind of unique exposures, and I think this is one of them where you know, you may not want to make this kind of like a bet on on one name or two names, and this allows you to kind of

get exposure to the basket. And you know, I think that's really how it how it survived because it's giving you access and it's doing it in a unique way, and it's it's kind of I think something that people can, you know, use to to capitalize on an idea that they may feel strongly about. On a scale of zero to ten, how it tend being high? How big of a Game of Thrones fan are you? I have to admit that I'm pretty pretty low. Okay, so you're like focused but plugged into that. Do you feel like it's

like too late for you? And if you go back you just want the time? That's how I feel. Yeah, it's not too late, man, I have to get on thenation and just do like a binge blush and I'm not sure that's just easible right now. I mean, like bang, this Game of Throne is gone a little bit longer. Something else in USC has that I think is really interesting is you guys have effectively a dragon et F.

What's that? Yeah, so that's the uh the Chinese Golden Dragon, and uh, the idea for this show just keeps getting better and better. You have a drag. What's the ticker for it. It's p as in Paul d J. So it's it's definitely a great way to access China. And it's been around since four and uh, you know, it's actually having pretty good performance this year. So it's something that is um you know, you might want to check out. That's because we're coming upon what's going to be a

big dragon showdown in Game of Thrones, no doubt. But

but what what's the premise of the e TF. So the idea of the ETF I mean, if you roll back in time is China was a little bit opaque and it was you know, it's hard to invest in a shares and so this was a way to essentially invest in China, but do it through companies that were listed on US exchanges and was spelt from kind of corporate governance standpoint that would provide a bit of extra protection to the investor and they could feel more comfortable

with the with the trans transparency of the US based listing. Yeah, I remember this one back in the day. F x I came out and that was only China shares listed in Hong Kong. But if you bought that, you were missing out on the US listed China shares, which ali Baba is one. Although the Ali Baba came out way after p g J, but it was the idea. What I recall researching my book that I was told. The idea was if you own F X I and P G J, you were kind of good on your whole

China because China is very hard. Yeah, but um, yeah, it's interesting. Um. This CTF also is you know, kind of in the in the same vein as the other ones. It's a survivor. It's been around since two thousand four, Um, two millions dragons. Get it done, man, they know how to do it. Yeah, to what we we've just looked at three like this game of throwne themes definitely seems to capture a lot of the Yeah, a lot of the surviving sort of firmly in the middle class type

ETFs that are used for very specific purposes. All Right, Nick Calligs, thanks for joining us on Trillians. Hey, it was great talking to you. Thanks for having me. You know, Kalibus, it sounds a little bit like Callisi, but you know, just I'll leave it out there. It's just another reference. Thanks for listening to Trillians. Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you like to listen. We'd love to

hear from you. We're on Twitter. I'm at Droll Webber Show. He's at Eric Caltuna. You can find Investco at Investco US. You can find Vanek at Vaneck. Underscore US Trillions is produced by Magnus Henrickson. Francesca Levy is the head of Bloomberg podcast Thy