10 Questions for: Dan McCabe, CEO, Next Investments

Are active ETFs more hype than help? What part should ETFs play in the boomer portfolio? Are we nearing an ETF bust? We ask these and other questions of Dan McCabe, CEO of Next Investments, known primarily for their suite of currency-based ETFs (and not be confused with Next Financial Group). Here's what he had to say:

Boomer Market Advisor: Active ETFs have gotten a lot of press lately. Are they a gimmick or the real deal?
Dan McCabe: I'd say today's structure is a gimmick and tomorrow's structure will be in it for the long haul.

BMA: So it's a viable product that just needs tweaking?
DM: I think that the structures that have been approved today are really nothing more than fully transparent, basically active indexes. So, given that structure, I don't think you're going to find a manager who can really produce alpha and then be willing to show people how he's doing it.

BMA: So in this case transparency works against them?
DM: Right, because you're getting charged for his alpha. So instead now I'll just mimic his portfolio and I won't pay him for it. You're never going to find a good money manager willing to do that.

BMA: Jason Zweig has taken over for Jonathan Clements at The Wall Street Journal. He caused controversy earlier this summer by writing that ETFs are too specialized and therefore destined to fail. The assets they attract aren't enough to keep them afloat and they lose money for the firm. Do you agree? Did we get too over-exuberant with ETFs?
DM: I think that the ETF structure is a phenomenal structure. You probably have a host of products that are on the market today that didn't need to be brought to market. There are certain products that were designed to be more trading vehicles than asset gathering vehicles. You have a ton of things out there that really aren't products that should be in a mom and pop portfolio. They were designed for different reasons. There are products out there that are under $50 million or under $100 million in assets that may trade fairly actively, but may not be garnering assets. But I think that's actually a healthy thing for the market to have a shake-out of weak product.

BMA: Where are we in the ETF/401(k) integration process and when do you think that's really going to
take off?
DM: I'd say once we start to really see the actively managed ETFs come to market. There are certain advantages that mutual funds have over traditional ETFs - specifically 12b-1 fees. They're the reason for these guys to sell these things. You have to find the way to incentivize the sales community to use an ETF. I think that's something the ETF community's still struggling with.

BMA: Is it ever an either/or situation in a retirement portfolio when it comes to mutual funds versus ETFs?
DM: I think they have to co-exist. I think mutual funds, as currently structured, are obviously at a disadvantage.

BMA: Do ETFs pretty much answer all of the complaints about mutual funds?
DM: Well, they're at a disadvantage because of the way the redemption cycle works and the fact that ETFs allow you to reduce the embedded capital gains inside the fund. If you look at the capital gains inside of the mutual funds arena, they're probably still well north of a trillion dollars. So, as baby boomers start to retire, you don't want to see the money being drawn down and people being hit with capital gains that they didn't trigger.

BMA: So what's next for the product?
DM: The ETF structure has a tremendous advantage and still has a lot of legs. But we're talking about a $10 trillion mutual fund industry and a $600 million ETF industry. So could it be that ETFs go to $5 trillion dollars? Absolutely. Mutual funds are not going away, but I think the ETF arena still has plenty of room to grow.

BMA: What separates your firm from other ETF providers?
DM: I believe that we probably spend more time and effort really beating up our concepts to make sure that we have it right; that there are no loopholes, nothing that's going to give the investor an exposure that they don't deserve or that they don't expect. We're really very careful that when something's designed, it's going to do exactly what it's supposed to do.

BMA: So it's more practical than some academic exercise?
DM: Exactly. I think we recognize from our past experiences as traders that when you risk your own money, you're a hell of a lot more careful than people who do it on some academic level and spout off about how a product should work. We're really coming at it from a practical level. I think that stands us apart.