ETF Expert Corner

Toroso’s Mike Venuto Spotlights Index Underlying the ETF Industry Exposure & Financial Services ETF

May 23rd, 2017 by ETF Store Staff

Mike Venuto, Co-Founder & Chief Investment Officer at Toroso Investments, spotlights the index behind the recently launched ETF Industry Exposure & Financial Services ETF (TETF) and offers his outlook on the rapidly growing ETF space.


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

Nate Geraci: The ETF we're spotlighting this week is the ETF Industry Exposure and Financial Services ETF, ticker symbol TETF. This just launched back in April and joining us via phone from New York to discuss the index behind this ETF is Mike Venuto, Co-Founder and Chief Investment Officer at Toroso Investments. Mike, our pleasure to have you on the program today.

Mike Venuto: Thank you so much for having us here today, Nate.

Nate Geraci: Mike - your firm created the Toroso ETF Industry Index, which is what TETF tracks. To start here today, what's the backstory? Where did the idea for this index come from?

Mike Venuto: Both my partner and I, Guillermo Trias, got involved in the ETF industry by being private equity investors in ETF startups. We saw this amazing growth story and yet, very little ways for people to participate in it. Each week, you're on the radio show talking about the benefits of these low-cost, transparent, tax efficient vehicles and yet, until a few weeks ago, there was no diversified way for individual investors and institutional investors to participate in that growth. When Guillermo brought this idea to me, at first we thought of it purely as a research idea. How do we build an index to help with our research of ETFs to understand the issue, or to understand the ecosystem, and really enhance our ability to understand ETFs better? Once we built that, we saw that this could be a very interesting exposure for investors.

Nate Geraci: Now, there's a committee that determines this index. Can you talk a little bit about that committee?

Mike Venuto: Sure. This index isn't your traditional passive approach, right? Although, it's delivered in a passive manner, it's extremely research intensive. The process is really about taking industry insiders, like Linda Zhang, who co-founded Women in ETFs and was an Executive at Windhaven, and Kris Monaco, who was the venture capital money behind things like HACK and AlphaClone, and Kevin Carter who's been a private equity investor in many financial services areas, including EMQQ and a few other ETFs. These are the people that have been involved with evaluating ETF companies in the private markets and in the public markets. Those three folks, along with Guillermo and I, really spend an enormous amount of time doing research on the ecosystem, and understanding how these companies are making money, and how it's flowing through. What we do, is twice a year we look at that universe and we hone it down to tiered systems, where we look to have the ones with the most pure exposure to the growth of the industry as the largest weights in the indexes. We're very proud of the team and the research we put together.

Nate Geraci: Mike - let's go into a little more detail here on the index itself, the Toroso ETF Industry Index. It's compromised of roughly 40 companies that are involved in ETFs in some capacity. Tell us more about exactly how these companies are selected and just how the index breaks down.

Mike Venuto: The first part is we have a liquidity screen to look at companies that are at least 200 million in market cap, and that's just to make it investible, and there are a few interesting pure plays out there that are very likely to go into the index when they meet that liquidity need. The next step is to bucket them, essentially we look at the industry by putting it into five different sections. The first and most obvious is the sponsors of an ETF. A company like WisdomTree or BlackRock or Invesco, and they represent right now about 50% of the index. The second tranche would be the exchanges. The exchanges are extremely involved in the growth of the ETF industry in so many different ways, right? For example, CBOE is one of our larger positions, because they own the VIX. The VIX is licensed to more ETFs than mutual funds. It's one of the only areas where ETFs actually have more assets than mutual funds. CBOE also owns BATS and they own, which is one of the, call it, competitor research companies in the ETF space. The third category would be the service providers. One thing I was looking at last night as I was working on some more in-depth research on the Vanguard phenomenon, right? Vanguard's not a public company, and even if they were public, capturing their expense ratio isn't that powerful, right? It's meant to be run at essentially a nonprofit level, but if you read through the prospectuses for the Vanguard products, I found 11 mentions of other companies within our index that are doing business and making money off of the growth of Vanguard. These are companies like Bank of New York or JP Morgan or State Street Global Advisors, doing the custodial work. Which brings us kind of the fourth category, which is what I call an index and data providers. So two other names in those Vanguard prospectuses would be MSCI and S&P. These are the index providers to many of the Vanguard products. You also see in there lists of names like FactSet and Morningstar. These are service providers, or data providers, that are helping explain the products in the ETF industry. The final category is what we call, liquidity providers, and this refers to your first guest, Phil, the people like KCG and Virtu, who are helping facilitate all the trading. We take those five buckets, we tier into five ... excuse me, four tiers, the participation of revenue, and we set the index using all of that research twice a year.

Nate Geraci: Our guest today is Mike Venuto, Co-Founder and Chief Investment Officer at Toroso Investments. Mike, I think you began alluding to this, but on the surface, it would appear that a number of the holdings in this index, even the top tier holdings, are companies that derive a large portion of the revenue from areas outside of ETFs. You look at someone like BlackRock - ETFs are a smaller, though, fast-growing portion of their overall revenue. Is that a potential issue in terms of using this index to capitalize on ETF growth?

Mike Venuto: It actually goes back to your first question, how do we really think about this, right? When Guillermo brought this idea to me, one of my first questions was, "Why hasn't somebody else done this?" I think the real answer is, if you simply go market cap weight and companies involved in ETFs, you're not going to come out with an index that really represents the growth, and really tracks the growth. What we do is really research these things in-depth and try and find how best to capture that growth. You take BlackRock, for example, they have 38% market share of the US ETF industry. Revenue, they generate off of expense ratios, appears to be a little over 30% of BlackRock's revenue. But what that doesn't include, is things like securities lending. BlackRock is the only real large provider that actually captures and retains 30% of the revenue they generate by lending out shares. So the number's even bigger. Then, if you think about what else is BlackRock doing in the ETF industry? Well, they're involved with ETF models, they have funds that own ETFs, they have a robo-advisor. They may not have the completely pure play from the sponsorship level, but it's obviously a growth trend. Then, you add to it all the service companies, right? SEI is the distributor, has reinvented itself as the partner behind BlackRock, and we capture that in the index as well. The research intensive process that gets delivered in the passive wrapper, is really how we best adjust for owning the ecosystem and the concerns with not having 100% of pure plays.

Nate Geraci: Alright, Mike – so let's boil this down purely from an investment standpoint. Why do you think the ETF space is attractive? We all know about the potential benefits ETFs can provide investors. Certainly we've touched on the amazing growth of ETFs, but why is investing in the ETF industry itself a good potential opportunity?

Mike Venuto: The first thing I would say is it's still very early, right? I've been investing in the ETF industry since 2005 and that's not a very long history. If we look at the amount of assets in mutual funds versus ETFs, it's still a fivefold difference. There's a lot of growth that can still occur. The ETF structure is simply a wrapper that's more efficient than the traditional structures used by investors to get access to the markets. It's our opinion that this will continue to grow and continue to innovate. The things like VIX and gold are amazing innovations that came over the last 10 years and have really changed the ETF industry and moved it to the next step forward. Then, we have things like smart beta. We constantly hear about the next iteration with bitcoins, or something like that. We strongly believe the entire ETF ecosystem will continue to grow, not just because the big firms are moving there, but because your listeners, the investors, prefer low-cost, transparent, tax efficient vehicles.

Nate Geraci: Now Mike, obviously we are big believers in ETFs, but we like to take a balanced approach here on the program. What do you view as some of the primary challenges for the ETF space moving forward?

Mike Venuto: This is funny, because I was working on this exact question last night as well. I highlighted two issues. Number one, everybody's calling it a bubble now. You constantly see Jim Cramer throwing a chair and then saying, "The ETFs are causing a bubble." I don't believe that to be true and here's why. We've done quite a bit of research to look and see how much on average of every stock do ETFs own and when we started that process five years ago, the number was about 2.6%. Today, it's up to 6.3%. I can't see how a structure owning only 6.3% of the market can be causing a bubble, especially when mutual funds are more like 30%. I don't have a problem there. I do believe ETFs can cause small bubbles in certain asset classes, but not currently at the broad-based exposure. Another headwind that is concerning to me is the expense ratio, the race to zero, and perhaps the growth is still there, but is the revenue growth dissipating? With that, I always point to Charles Schwab. Schwab, five years ago, was not even in the top 10 for issuers and today they're number five with a solid position at number five in terms of market share. It's because Schwab didn't do it just by doing low-cost fees. They did it by converting assets, by building the OneSource platform, by acquiring ETF strategists, they've approached it in a very different way. I do believe the race to zero will continue on traditional beta, but bringing in innovations like intelligent ways to do active management in the ETF, or even better, smart beta ideas, or even new ways of using the ETF structure to get access to things that haven't been accessible before like bitcoin or certain indexes like a Case–Shiller or something like that. I don't believe the growth is over in revenue either.

Nate Geraci: Mike - we have just about one minute left here. One of the criticisms of the ETF space is that there are too many products out there and some of the ETFs being launched are perhaps too nichey or too narrow in scope. I'm sure you saw when TETF launched, Barron's actually ran a piece with a headline, "Peak ETF Mania: Are We There Yet?" They were sort of implying that perhaps an ETF or the ETF industry has now gone too far. Again, we have about 60 seconds left here. I'm curious, what's your take on ETF proliferation?

Mike Venuto: Yeah, so that article from Crystal Kim at Barron's, the headline made that implication, but if you read the article, she was very positive on the idea. Remember, this is first a research tool of the industry. Over the last five years, about 1,500 ETFs have launched and 500 have closed. Good ideas will move to the top, bad ideas will close. That's a good creative destruction, and it's how the industry should grow. If every idea just stayed alive, that would be terrible. I think that the proliferation of white-labelers, and strategists, and firms that are historically using ETFs, getting involved with creating them, will listen to the clients and hear what they want to have. In fact, maybe we should help you create an ETF Store ETF.

Nate Geraci: Mike - real quick, I know you speak for the index behind TETF, but where do you think TETF fits in an investor's portfolio?

Mike Venuto: Its overlap to the S&P is only 5%. Its overlap to the financial services, or financials index, is only 21%. This is a growth story, it's a global growth team, and this is a way to get exposure to it. These are the companies in the financial industry with the higher margins that are growing.

Nate Geraci: Well Mike, with that, we'll have to leave it there. Very interesting index and ETF, congratulations on the launch, and I know we'll certainly be watching this ETF with a keen interest. Thank you.

Mike Venuto: Thank you for your time.

Nate Geraci: That was Mike Venuto, Co-Founder and Chief Investment Officer at Toroso Investments. If you would like to learn more about the Toroso ETF Industry Index, you can do so by visiting That's