ETF Expert Corner

ETF Industry Pioneer Ben Fulton Discusses ETF Innovation, Elkhorn ETFs

March 1st, 2016 by ETF Store Staff

Ben Fulton, ETF industry pioneer & CEO of Elkhorn Investments, talks about the early days of ETFs and the continued innovation since.  Ben also spotlights the Elkhorn S&P 500 Capital Expenditures ETF (CAPX) and the Elkhorn FTSE RAFI U.S. Equity Income ETF (ELKU).


You can listen to our interview with Ben Fulton by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I’m now pleased to welcome to the show Ben Fulton, CEO of Elkhorn Investments. Ben is considered one of the founders of the ETF industry. He helped grow PowerShares into the country’s fourth largest ETF provider. Prior to that Ben was with Claymore Securities and Nuveen Investments. He has some 30 years of experience in the investment industry. I should note, Ben and his product development teams have won eight most innovative ETF awards. Ben is now joining us via phone from Chicago. Ben a pleasure to have you with us today.

Ben Fulton: Well thank you. It’s my honor to be with you and thank you for the invite.

Nate Geraci: Ben, first I would just love to hear more about your background in the ETF industry. You’ve been involved in ETFs since the earliest days. How did you originally get involved with ETFs and take us through the founding of Elkhorn.

Ben Fulton: Oh yeah that’d be great. 30 years ago I started as an advisor and grew up on a farm in Ohio, knew nothing about finance other than I thought it would be an interesting field, something I wanted to go into and knew my dad had a broker. I went and got my Series 7 license and worked with firms like Thomson McKinnon and other groups. Over time I actually became a commodity trading advisor in the late 1980s. I think it was from that foundation I probably figured out pretty quick I was better at forming the fund and the concept of the company than I was maybe managing the portfolio. What I started doing was I started looking and saying, “Hey you know what, I enjoy the process of thinking about what does an advisor need or what does a client looking for or investors look for in the marketplace.” Started this direction of what are the best ideas, what do I like? Really love passive investments. Actually my first entre was in a firm that’s now called First Trust back then it was called Nike and started creating Unit Investment Trusts which were baskets of securities, stocks or bonds. From there the ETFs were just coming online.

I immediately flew out to New York, met with Nate Most and Gary Gastineau and others of the American Stock Exchange and really looked at what was the underpinnings and what does ETF mean for the industry? At that time I was at Nuveen, we put in a filing to actually move forward with creating the first, some of the first ETFs. It coincided with iShares launching their platform and literally iShares locked down every index known to mankind. Nuveen made the decision then, “We’re not going to go this direction.” I decided to go start Claymore which is now Guggenheim and one of my other partners took the relief and the filings that Nuveen had and went and started PowerShares. A couple of years later we came back together and I came in to run product development. He ran the business and over the course of the next 10 years probably launched 200+ ETFs in the marketplace. Our foundational thought always from the beginning was that indexes aren’t really good or bad, I mean they’re amoral we’ll call them, but at the end of the day cap weighted indices probably were more invented at the beginning as a yardstick on how you measure the performance of a mutual fund manager and then how do you compensate them, than it was about the right way to invest.

We started this idea of how do you look and screen securities or even sometimes deselect. How do you get rid of the bad stocks out of a portfolio and how do you bring maybe even some thematic ideas. Some of our early great products were around water, around clean energy. In time it became screens off of working with S&P to create low vol, the S&P low volatility. Or even different ways of weighting so then we’d work with groups like Research Affiliates and others. That’s really what led me to the thought. I was at PowerShares about 10 years, the last half, the last five years I ran the business. I was head of the global ETF business, but I started looking saying I love ETFs but I also realized investors and clients may like it in a different wrapper. Or the ETFs may be the building block and it needed to be in a managed account, a fund, and elsewhere. For Invesco they wanted it segmented, and the more I looked at it I thought, “You know what, I should just go create a new firm that ETFs are the underpinnings and it could be us launching an ETF or it could be us creating structured products and managed accounts and UITs and ETFs and other structures using ETFs.” We’re kind of both a friend and a competitor in the ETF space in that we’re working with a lot of large ETF firms to create ETF portfolios that use their ETF. Where we see there’s a need we’re often not afraid to build those new ETFs into the marketplace.

Nate Geraci: Ben as you look back to the early days of ETFs what did you see as the potential? You mentioned that you like the passive aspect or the indexing aspect of ETFs, but what else interested you about ETFs?

Ben Fulton: What drives me is I like the idea of being the first to market or driving towards what is the new areas and how do we “win” in thought and concept and idea and helping investors be able to access the areas where that … Frankly the first few years I probably had no concept on how large the ETF space would be. You realize it was important but it wasn’t there. What happened was I started doing some analysis and looked at the growth of mutual funds. Now that took over decades instead of years, and the growth coincided with the amount of funds that were offered in the marketplace. When I essentially created a chart that had two different timeframes and then said, “Let’s look, and now it’s going to be more compressed and in an ETF model, what are we going to see?” You started realizing there’s going to be thousands of ETFs and it was going to take 20 years to do what took 70 years for mutual funds, and you’re seeing that work out. The one thing I always say is when people say, “Wow! There’s an explosion of ETFs and how do I digest?” What people have to realize is there’s really … Before you have the ETF there has to be an explosion of indexes that are being created.

Those indexes have to be utilized to access something that hopefully is both value-added but it’s also first of its kind. That’s the exciting thing to me is just seeing who’s involved now. When we first started in this industry, there was a handful of firms that would create an index. No top tire research provider wanted to be associated with creating an index because that was something that was rules-based and simple. Today the smartest minds on Wall Street or around the world or in academia are associated with creating indexes. I think that huge mind shift only means the future is going to be even larger than anyone thinks. It will trillions and trillions and trillions of dollars. It’s also a great platform for global investing and yeah so that’s very exciting.

Nate Geraci: Ben as you look at ETFs today there are over 1,800 ETFs available that to your point cover seemingly every sliver of the financial markets. Are you surprised by just how far ETFs have come since you first became involved in ETFs?

Ben Fulton: As I said it took me probably four or five years to think large enough, and now I’m not surprised. In fact, I think you’ll see multiple, you’ll have six, seven, eight thousand ETFs is my hunch in the next 10 years. That’ll get you to the multitrillion dollar. What point does it surpass or compete with the total AUM in the mutual funds space? Some of that is regulatory-driven, until you can get ETFs readily available and in everyone’s 401(k) plan or in their retirement plans, you’ll probably have a hard time. I think at least in the mind of the investor it already probably represents their investment, the preferred investment median on how they’re going to invest. There are still some regulatory issues of how do we get those into more spaces and more places.

Nate Geraci: Again we’re visiting with Ben Fulton, ETF industry pioneer and CEO of Elkhorn Investments. Ben we had a gentleman by the name of Tadas Viskanta on the show last week; he’s founder and editor of Abnormal Returns. We asked him whether ETF innovation is a double-edged sword, and that we know that all the wonderful benefits of ETFs: low cost, tax efficiency, transparency, so on and so forth. Some ETFs have certainly brought about increase complexity and there are a lot of niche products on the market. I’m just curious, how do you view this? Is ETF innovation generally good for investors, they just need to be sure to keep their guard up?

Ben Fulton: I think product designers or product engineers like myself probably are a little … If there’s one thing we’re guilty of we can become infatuated with complexity so sometimes it’s, “Hey, this isn’t simple enough.” We’ve got to figure out how we do something even a little more complex and it’s not for the benefit of the investor, it’s probably more for the journey of can we do it? I tried to put a bridal on that in my own mind to say, “That’s not really what we need, simpler, I still feel is better.” I think the great thing is capitalism works incredibly well within the ETF development space. If you cannot raise enough assets to pay for the expenses, those products will be closed down and in the future those products won’t be brought to market. I think it works but it probably takes two to three years to work through the process and the system. In some ways we haven’t had as many new ETFs here recently, but what you’re starting to see now is the advent of what I’ll call more the private label ETF. An advisor or an institution may look and say, “We have enough assets to make this worthy, we’re going to put it into an ETF instead of just into a managed account and then let the rest of the world decide if they like it as well.”

That is going to be one of the next stirrings, and some of those are a little more complex than I probably like because I’m still a believer that ETFs are building blocks. They’re bricks in a brick yard, they are not the full building or the full edifice that needed to be created. Some of those are probably more completed portfolios and I’m not sure that’s where the world quite is yet. I think they may get there but at this point it is still how do you combine ETFs together to create a better portfolio; it’s not the portfolio itself. That’s at least at this point I feel like that’s still the driving force, but there’s still a lot of advancements that need to happen. We’re working with some very simple basic ideas. We’re looking at believe it or not there’s not a group of midcap sectors out there; I don’t know why. If you wanted sectors in the mid-cap area in the US they’re not available. You go, “How does that miss over?” Some of it is just because we all were racing to build things quickly. Fixed income needs a lot of advancements. There’s probably a lot of redundancy in products but there’s a lot of new areas that if a person wants either specific areas or whatever it’s just not available right now. Hopefully simpler will be the driving force, not more complex but I agree with you I guess, that is the danger side. The good thing is, it’s not cheap to run an ETF platform. If you can’t raise enough assets you know you’ll be into … You’ll begin to see those products go away.

Nate Geraci: Again we’re visiting with Ben Fulton, CEO of Elkhorn Investments. Ben let’s talk about Elkhorn Investments. You’ve launched two ETFs, the Elkhorn S&P 500 Capital Expenditures ETF, ticker CAPX, and great ticker by the way. The Elkhorn FTSE RAFI U.S. Equity Income ETF ticker ELKU. Let’s start with CAPX, this is the one that won the William F. Sharpe Achievement Award for ETF Innovation of the Year last year. Tell us about the ETF and where it might fit in an investor’s portfolio.

Ben Fulton: This is one of these pioneering works. We tried to keep it simple but really our thesis here was we’re looking at exactly where we’re sitting today where companies are hoarding cash. When they hoard cash there’s only a few things they can do. One is pay dividends, great, the good thing is there’s a well-developed pipeline of ETFs that do a great job of being dividend focused … Those are readily available. The other would be a buy-back and buy-backs again, great idea, we like. I have buy-back products I created at PowerShares but all the major firms have buy-backs. We said that’s great and they’re readily available and it’s out there, but the other area that is I feel like is the only one that’s actually built long-term value into a business, because dividends and buy-backs are short-term; they’re either paying a return to their investors and that’s good but they have to continue paying it to make it. It’s not growing the business; buy-back is just shrinking the amount of shares, which can have some short-term influence, but what really built the business that is companies that actually have a great business model, are wanting to reinvest.

Then the one thing that S&P helped us design was this CAPX efficiency which said and it’s not just enough they reinvest but they have to reinvest and then have accelerating growth of revenue. They have to be efficient in their CAPX investment. We looked and said if you start with a premise, “Gee I want to work, I want to invest in profitable companies that believe in themselves enough that they’re investing in.” When they invest they can actually increase their revenue growth. I think most investors are saying, “Yeah, I think those would be companies I would like to invest in.” The exciting thing is in time once we get momentum with this product, this works in every cap at every country in the world, because of the same phenomena. This isn’t tax-driven, it’s not … There’s no other purposes around, this is the same thing. The only way you have excess cash is you’re profitable. You have to be a profitable company that believes in itself, that reinvesting and what that reinvesting can grow their revenues. Growing revenues means I have good a thing, so it’s great … Even if it’s rules-based it ends up being a stock-picking growth portfolio. There tends to be a shortage of growth-focused ETFs, most of them were value-tilted. If you take low volatility, dividends, all those, they tend to be lower … I have a value tilt to them, which value is phenomenal but if I want something that is more growthy, how do I get a growth portfolio? We think this provides that. Then last but not least in an upward interest rate environment historically this thing is really outperformed during this time. If the wind that occurs, this is also a good hedge towards rising interest rate.

Nate Geraci: All right Ben, we have about two minutes left. Your other ETF the Elkhorn U.S. Equity Income ETF ticker ELKU, this just launched back in December. This seeks higher dividend yield in US stocks and it screens for sustainable income, companies that are financially healthy. Briefly tell us about this ETF.

Ben Fulton: This was founded by the same group that brought the first fundamentally weighted ETFs. The importance of that is fundamentally weighted ETFs if you look at it are companies that since they’re not weighted by their capitalization weighted but instead we’ll say weighted by their GDP footprint in the economy. So, what’s their cash flow, what’s their revenue and then look in a company in that direction. PRF is the large PowerShares of Footsie Rothe fundamental. This is a kissing cousin of that brought by the same group but now it has an extra focus on dividends. It’s going to be weighted very similar, brought to you by Footsie Rothe but the added thing is that you get about 150 basis point higher yield because of the dividend intentionality in selection. That happens to transfer into great opportunities to get long-term. We feel like being paid as you wait but then also improving hopefully the total return in the long-run because of the increased dividend yield. Simple story and it’s a derivative off of a very popular famous product the PRF. We’re excited about that and excited to be working with Research Affiliates on this product.

Nate Geraci: Ben we’ll have to leave it there. Just a pleasure having you on the program today, we certainly appreciate your time.

Ben Fulton: Well thank you very much and continued success to The ETF Store.

Nate Geraci: Thank you. That was Ben Fulton, CEO of Elkhorn Investments, and you can learn more about Elkhorn ETFs by visiting that’s