Jenine:
Hello, everybody. Thank you so much for joining Straight Talk. I just found out this is our 20th episode and I couldn't be more thrilled than to spend the 20th episode with my colleagues here, very formal gentlemen, as you can see with the ties. Can you introduce yourself, Justin?
Justin:
Absolutely. It's good to be here and it's good to have a tie on. My name's Justin Hansen. I'm a managing director in global strategic accounts. I have our U.S. strategic accounts, so a lot of the firms that you all work for in the home offices, as well as oversight of the SMA business.
Jenine:
Jamie.
Jamie:
Jenine, proud to be here for the 20th episode. Thanks for having us.
Jenine:
The three J's.
Jamie:
That's right.
Jenine:
Justin, Jamie, Jenine. It's the Three J show. Sorry.
Jamie:
Yeah, no problem. It's meant to be.
Jenine:
Yes.
Jamie:
I'm head of ETF Capital Markets here.
Jenine:
Oh, you are.
Jamie:
Head of ETF Capital Markets here at MFS.
Jenine:
You joined us when?
Jamie:
June of 2024.
Jenine:
Awesome.
Jamie:
It's been quite a ride.
Jenine:
We're going to be talking about SMAs and ETFs, but let me just take you a little back, not to date myself. But when I started in the industry, really there were two main share classes for me to learn. A shares and B shares. And then we got a little complex, didn't we? And the third share was C shares, which really was the start of charging a fee. Right? And then we got very complex and I think we have a slide. And I think we could have probably added to this of the complexity of what's out there of doing business. As you can see, whether it's SMAs, ETFs, tax efficiency, direct indexing, alternatives, I mean, it's gotten complicated and we're here to simplify it, right?
Justin:
Absolutely.
Jenine:
Talk to me a little bit about SMAs and how the landscape's changing.
Justin:
Yeah. Look, the world has absolutely changed, Jenine, and I think our industry has done an unbelievable job complicating the world. And our job, I think, is not only to simplify it, but allow advisors to then simplify for their clients, because they don't really care about the letter in front of or at the end of the mutual fund. It's about what is going to get me the best outcomes to help me achieve the goals that I have for me and my family. And so the SMA world is absolutely shifting. The vehicle world is shifting. I would actually tell you, it's the equivalent to me of when you clean your garage. It gets messier before it gets cleaner. Everything is out in the driveway and it doesn't get cleaner until you actually one by one put the things that you want to keep in there. Right now, the world is complicated. This stuff's all out in the driveway. And again, we need to clean it up.
With the SMAs and the ETFs, it is absolutely an opportunity for us to do that because you have all of these vehicles. But the fee-based business is growing. It's continuing to grow. It's not going to stop growing. It makes a lot of sense because it puts the client on the same side of the table as the advisor. But again, it's like a car wash in a way. Back in the day when it was, you're talking about A shares and C shares, that's when you went to a car wash and bought one car wash. 10 bucks, got your car cleaned, they cleaned it, they washed it off, good to go. Now what do you do when you go to car wash? You have a subscription service. It's a recurring revenue and now people go to the car wash more often. I think it really allows the advisor to help their clients holistically. And so this isn't going anywhere. This is going to continue to move. It's moving quickly. And I'm glad we get to talk about it today.
Jenine:
SMAs are growing rapidly.
Justin:
Yep.
Jenine:
And so are ETFs.
Jamie:
Sure are.
Jenine:
Yep. Give me a little bit about why.
Jamie:
Yeah. I love that analogy about the car wash. And let's just continue down that road. When you show up to a car wash, used to be 10 bucks carwash, you're good to go. Now it's, do you want the Supreme Wash? Do you want the undercarriage? Do you want the wax? ETFs have absolutely proliferated since I've been in the industry. I joined in 2010. And when I joined, ETFs were passive beta, cheap beta exposure, tracking and index, right? And we have absolutely moved away from that. 2019 regulatory wise, the SEC passed what we call the ETF Rule. As a result, that kind of codified listing standards for issuers. It brought an immense amount of product to market. And as a result-
Jenine:
Back up.
Jamie:
Yeah.
Jenine:
What is that rule again?
Jamie:
Sure. We call it the ETF Rule. It's rule 6c-11 to be formal about it. But basically what that did is it codified listing standards for managers to bring an ETF to market. Before that, you needed to get exemptive relief to launch an ETF. That could take up to a year or plus to get that relief. With this listing standards, it said, "Hey, if you prescribe to point A, B, C, D, then you can launch an ETF."
Jenine:
That's why we're seeing so many-
Jamie:
Huge amount.
Jenine:
... Active ETFs come out.
Jamie:
Over 800 ETFs launched last year, 85% of which were active from 72 new issuers.
Jenine:
Wow.
Jamie:
Yeah, we are at an inflection point.
Jenine:
Wasn't there some stat of more ETFs than McDonald franchises or something? Didn't you-
Justin:
I think that's the case. I think there's more ETFs than stocks, right?
Jamie:
More ETFs than stocks, more active ETFs than passive ETFs for the first time.
Jenine:
Wow.
Jamie:
Yeah.
Jenine:
Wow.
Justin:
World's changing.
Jenine:
The world is changing. The question in particular with MFS, people are asking, is the mutual fund dead?
Justin:
I started at MFS in 2003, and I remember an article asking the same question, is the mutual fund, is it dead? It was on Time Magazine. And the reality is, no, the mutual fund isn't dead. And you can see though where the business is changing. You can see on the slide that you have in front of you is, while the mutual fund isn't dead, and I actually think the majority of us on this call and the three of us sitting here will actually retire with the mutual fund still being the largest AUM pool that exists out there, but the reality is this.
Jenine:
Yeah, that's a big pool, right? 13.9, is that what I'm reading?
Justin:
Massive, massive pool. Almost $14 trillion. I think the market's up, so it could be even more, but the growth of the SMAs and the ETFs continues to become massive. You see there's less being allocated to the mutual fund and there's reasons for it. And there's reasons to allocate more towards an SMA and an ETF. What I'll put out there is the world has never moved this fast and it'll never move this slow again, but it doesn't mean the thing that existed before is gone. What it means is there's more out there. And that's why we're here today to talk about what is the more out there and why.
Jenine:
Yeah. Talk to me about SMAs and why do people love them?
Justin:
Yeah.
Jenine:
And you in particular, I am sure, have sweatshirts and T-shirts that say I love SMAs. Wallpaper.
Justin:
Pretty much.
Jenine:
Yep.
Justin:
Yeah.
Jenine:
What is that passion? Why do you think SMAs are a great vehicle?
Justin:
The SMA is unbelievably tax efficient and it's a great way to continue to use a manager like MFS where you're getting our intellectual property, but you're able to actually own the stock at the cost basis you bought it for, not maybe what we bought it for. That's a really big difference, but it's not just SMA. With the unified managed account construct that exists at almost every broker dealer today, that UMA, it's not SMA versus fund versus ETF. In fact, you're using all of it. You're going to have individual stocks and bonds. You're going to have ETFs. Some are going to be passive. Hopefully a lot of are going to be active. You're going to own mutual funds. You're going to own SMAs. You're going to actually own all of it. You're not choosing where... They're really not competitive to one another. There's reasons that you do it.
I also think with SMAs, there's a cache to it. When people go on Saturday night and they're at a cocktail party, people don't talk about they love this mutual fund they're in. They talk about what stocks they're owning, what's going on with X, what's going on with Y. The world is shifting. People like talking about that. It doesn't mean it's their entire portfolio, but I think there's an aspect for advisors that it makes sense for clients to own individual stocks. Instead of sitting there and choosing individual stocks, you allow a manager like us to do that in a really tax efficient way. And I could talk more about that as it pertains to the technology that these firms have. That's not us. It's actually the advisor's technology. We'll talk a little bit more about that in a few minutes because I think that's what makes the SMA great.
Jenine:
Okay. But you have I love ETFs everywhere and that's your wallpaper.
Jamie:
That's right.
Jenine:
Why do you think people love ETFs and that vehicle keeps growing?
Jamie:
Yeah. Yeah. I think a lot of the same key benefits, although they're achieved in different ways, right? The three T's for ETFs, right? They're transparent, they're tradable, and they're tax efficient, right? They've proven very versatile vehicles. They've got the transparency to talk about the cache that Justin mentioned, but they're also very powerful in terms of their tax efficiency. And we achieve that in a different way. Justin mentioned inheriting a cost basis at your purchase price, right? In ETFs, we're more similar to the mutual funds and that you will inherit the cost basis of the time that security was originally acquired by the portfolio manager.
The difference being is that we utilize a middleman, a market maker, and we utilize an in kind delivery into and out of the fund, which helps us to avoid having to make sales in the marketplace and realize that capital gain as a result. Typically, we're much more tax efficient than the corresponding mutual funds and we're able to avoid paying those capital gain distributions to an investor.
Jenine:
Okay. Tax efficiency, right? Ironically, what do we got? April 15th, right around the corner. Near and dear to everybody's hearts as taxes are definitely a pain point on keeping wealth. How does the SMA do it?
Justin:
Yeah. Tax alpha, I think there's not a lot of advisors yet. If you don't know it's still in its infancy and there's massive opportunity to do this. And there's a really great amount of reasons. One is, as I mentioned before, you're owning that cost basis. If we buy a stock at $100 a share, you inherit that stock at $100 a share, it's your stock. But the beauty is the tax overlay systems that actually exist, Jenine. And what that is it allows the software and the technology to find losses and harvest those losses. That way when stocks are sold at a gain, you actually don't have to pay the IRS potentially, right? If I sell something for $20 in a gain, but I've harvested $20 in a loss, I now have that opportunity to actually have no gain in that portfolio.
It's marrying the MFS or the manager's intellectual property of the best active stock picks that they have in a given strategy and marrying that with technology. Dealers have that technology, the firms have that technology, or if you work in an RIA, you actually outsource that technology to a tamp. And so between the tamps and the dealers marrying it with our intellectual property, you get really great outcomes for clients.
Jenine:
That triggered the growth.
Justin:
It triggered the growth. We hear about direct indexing all the time. Directing indexing is almost a passive way of doing an SMA. The active management of an SMA actually creates more tax lots. More tax lots creates more opportunity to harvest those potential losses. And so again, active management is here. It's a really big deal, but how do you again take our portfolio managers and analysts top picks, but look at it holistically and then be able to make it more efficient? If you can be up-
Jenine:
Say that again about the tax lots, because I think that's really important.
Justin:
If you think about this, if you just own 50 stocks for the last 10 years, most likely those stocks are all up. If you sell them, there's going to be a gain. If you actually buy an active manager, we're buying and selling. There's volatility in the market. The world's kind of crazy if we haven't looked on the news. And so because of that craziness, it actually can be used as an opportunity. Volatility creates opportunity. And so when you do that type of thing, it actually has that opportunity to sell the loss to offset those future gains. You need active management, not only from the standpoint of concentration risk and all the things that we've overheard in the market for the last few years, but you needed to create those tax lots to have that harvesting opportunity. It's a big deal.
Jenine:
For all those advisors who really are saying why active and heavy, heavy, passive, you just answered it.
Justin:
It's another answer. And the other reason is you cannot have multiple advisors with tax overlays. Think about it. If I have one account at one firm and another account at another firm, I'm going to create wash sales because those tax overlays aren't going to be talking to each other. As an advisor, it's an unbelievable way to consolidate to you because I want to make sure I holistically look at your portfolio. The IRS sees you as one person or one entity, not multiple. And so I can't be selling one stock and buying it over here and another, it's a great consolidation opportunity for advisors.
Jenine:
Wow. That's a great idea. With ETFs, what are the myths out there?
Jamie:
Yeah. There's still a lot of misconceptions, right? I think a lot of the reason for the growth is we're clearing up those misconceptions every day. And that's on us, the issuer community, to be on programs like this and help solve some of those for our clients. But we're going to continue to see these ETFs proliferate as we kind of see the awareness of the benefits proliferate. And in terms of the misconception specific to active, and like I've said, it's an active environment. Everything we're seeing in the ETF side being launched today is on the active side. And I think one major misconception is that this is a new thing like active ETFs are new. And that's certainly not the case. First active ETF was launched in 2008. And so they've been around, they've been stress tested. This market structure that we have around ETFs, it's rock solid and it's really incredible to watch.
It's been incredible to watch it over the last six weeks. It was incredible to watch it in April and spring of last year. Pandemics off, you name it. The Fed's preferred mode for stimulus was fixed income ETFs back in the pandemics off. They're powerful vehicles, they're time tested, they are stress test. They provide an immense amount of price discovery and liquidity for advisors and flexibility, which is key. We can talk about tax efficiency, that gets a lot of the attention. Justin talked about in the SMAs, how they're able to harvest losses and actively use technology in order to identify gains and minimize those gains where they can. For the ETF, we're able to use a different sort of technology in house to MFS where we identify those high cap gain securities. We make sure they're disposed of via in kind and not realizing gains for our investors, but there's also this tradability, this transparency that really is resonating with investors, especially on the active side, especially in times of volatility like we're seeing today.
Jenine:
MFS, very excited that we launched a lot of strategies, obviously that's why we hired you.
Jamie:
That's right.
Jenine:
But not all firms are equal. I'm going to do a little probing. Why would someone use MFS? What's our competitive advantage over someone else?
Jamie:
I am really glad you asked. And I think I'll take it a step back and I'll say, so we talked about the immense amount of products coming to market over 800 last year, new issuers, 72 new issuers. The secrets out about these active ETFs and the benefits they provide. What's really important and what people don't necessarily understand, and it's starting to get attention, is that there's an industry capacity issue, where all of these transactions, keeping tight spreads for our clients, we manage their transaction costs, putting on these tax trades to keep the products tax efficient. All of these things require balance sheet from market makers, authorized participants, the market participants that make up this powerful ETF ecosystem. In order to obtain that balance sheet now, but especially again at times of stress where the proverbial excrement has hit the fan, that's when you need to be able to partner with really powerful liquidity providers.
And at MFS, we get to play with the A team here, and that's because we've been around for a hundred years. I sit on 33 with our traders who have been developing these partnerships with the street over a very long period of time. When we need them, they step up for MFS. I would just stress to your viewers and our clients and investors that when you're considering another ETF allocation or a new ETF allocation, yes, important to look under the hood. Look at what the fund holds. You can do that. They're transparent, but look at the team, look at the firm you're partnering with. Make sure that they have the infrastructure, the human capital required to manage these products for you, not just in times of market tranquility, but in times of market volatility, which is the most important.
Jenine:
Let's go back to that. Dive a little deeper what you mean by the A team. What makes them the A team versus, because I think that is important when someone's doing their due diligence. You mentioned it, you did it really quickly after the very fancy way of saying something else, but what should you be really looking for? Why do we have the A team?
Jamie:
We have the A team because of our experience, our ETFs are leveraging our existing capabilities, our core capabilities, our existing investment teams. These investment teams have been around for quite some time and they've built these partnerships up with the premier liquidity providers on the street.
Jenine:
Got it.
Jamie:
We have the A team-
Jenine:
They have the relationships.
Jamie:
We got the A team internally and we're working with the A team externally.
Jenine:
And that's really important with volatility.
Jamie:
Absolutely. The most important during times of a volatility. A lot of different issuers will be able to mask market quality because markets are calm. It's when spreads blow out, it's when you walk in the morning and the market's down 5%, all of a sudden a competitor ETF may have a 25, 50, 60, 75 basis point premium discount. Who are the issuers that can manage that effectively?
Justin:
And I'll just say, I think we're partnering with the A team on the SMA side too. The difference is the A team are the broker dealers that we work with. It's all the advisors that we work with. We're taking intellectual property, marrying it with their technology, not our technology. The A teams are key, whether it's inside of the firm, market makers, technology from the outside, you need all of that today to make it work. And in the good news, the outcomes for the clients just become better and better because of it.
Jenine:
That's great. Can we list, put up the slide that shows actually our current lineup of SMAs and active ETFs for anyone who's taking a look? I must admit, I love how we did our symbols of our strategies, make them easy, right? Making the complex, simple. What is around the corner with these vehicles and MFS?
Justin:
Yeah, look, I think it's more of this, right? It's taking the capabilities that a firm like MFS has and putting them in different wrappers if it can be done and if it makes sense, you have to have it make sense. I don't see an emerging market debt SMA anytime soon, but taking-
Jenine:
Why?
Justin:
It's a complicated, a lot of very expensive bonds that you'd have to have. You probably have to have a $10 million minimum. We have to make sure that it makes sense, but that may be a place for the mutual fund or the ETF. But the reality is how do you take a strategy and put it in multiple vehicles, then allow the advisor and the client to utilize that vehicle where it make the most sense for that client based on their tax situation and based on what their goals are. For certain clients in a DC plan, I'm going to be fine with the fund. For another client, I'm going to want the ETF for a high net worth client and a domestic equity piece, an SMA might make sense. I think it's making sure you're packaging that and then allowing the advisor to choose what makes sense for them and their client.
Jenine:
What about with ETFs? What's around the corner?
Jamie:
Yeah. I mean, we've had a super successful launch here at MFS with our ETF franchise. And I think the reason for that is because they serve as natural extensions of our core capabilities. Our advisors, our clients, they know us, they've known us for a long time. They know our investment teams. They know our track record. They know we're in it for the long term value creation. And the ETFs that we launch are going to continue to go along that path, making sure that we're leveraging what we're really good at. Where can we provide value for our clients? Where can we solve problems for them and create that value long term? Certainly we've done that with the launch of our initial suite and excited to keep going.
Jenine:
More is coming. More and more.
Jamie:
More to come.
Jenine:
Cool.
Jamie:
That's right.
Jenine:
All right. You want to take some questions?
Justin:
Sure.
Jenine:
We had some questions come in. First one from Michigan. Why do some broker dealers limit trading in active ETFs?
Justin:
Yeah. Active ETFs are proliferating. Jamie, how many did you say earlier?
Jamie:
Over 800 last year.
Justin:
Okay. Over 800. Believe me, you do not want 800 ETFs on your platform today. If you're an RIA and have the ability to trade anything, makes sense and you can kind of filter through that. One of the reasons broker dealers wait on that is they want to make sure there's enough assets under management, but more importantly, they do diligence those strategies and there's some time. They want to curate a list of those ETFs that are best of breed for advisors and clients to use. And it just takes typically a little bit of time to make sure that we get in front of them, they have a full coverage model, that there's actually a writeup from an analyst on that product.
Look, mutual funds, there's so many of them. And what ended up happening is broker dealers actually had to do a rationalization exercise to start taking ones off the platform. As firms rebuild with ETFs, they're going to be really thoughtful how they do it. And I think it's actually probably pretty important to be thoughtful because as Jamie talked about, not everyone's created equal. How do you do things? How do you look under the hood? And so I think that's what firms are really doing versus just, yeah, it's on the primary market, it's just open. It's really curating that list to ensure really good client outcomes.
Jenine:
Thank you. From Arizona, what makes an SMA better than just buying the stocks in a brokerage account?
Justin:
Well, I'll take that one too. Look, buying stocks in a brokerage account I think can make sense where you have a concentrated stock position, you're an executive that works for a firm and you have a lot of stock. But typically hiring a manager like MFS that has deep expertise into picking stocks and bonds actually seems to make a lot more sense because we all want to do what we're good at. And I think we're really good at picking stocks and bonds. And what it allows the advisor to do is create capacity for growth. Instead of picking those stocks and bonds yourself, you hire a manager, you outsource that to do it, and you go find more clients. And clients are demanding so much of advisors today beyond the portfolio, it frees them up to talk about all those other things. Estate planning, what are you going to do about my parent that's getting older, all those things that the client actually wants you to do. And so I think outsourcing to a manager makes more sense in my opinion, but we're biased.
Jenine:
I'm actually going to ask you a question from Minnesota and someone new getting into ETFs, what are some of the tips with trading? And I know we have some pieces out there about that, but you've talked about that when you joined the company.
Jamie:
Yeah. Let's just start with that. We've got a lot of great resources on our website for investors to check out specific to ETFs, best practices trading, biggest misconceptions. We just did a new one on implied liquidity, what advisors should be looking at when assessing the liquidity of an ETF. Please go take a look at those resources. I think they'll really help you when you're evaluating potential new positions. But specific to what you said, when trading an ETF, what's the best practice? And we typically tell clients first and foremost, leverage your platform trading desk where you can. If you're putting on a block trade, anything over a million dollars, 10,000 shares and up, it's the best way to ensure best access to leverage your custodial platform trading desk. But there's other ways, right? Engage with your capital markets team. We can help provide price discovery, trade strategy, whatever the size may be.
If you're going to trade odd lot sizes under blocks, smaller trades, use a limit order. A limit order provides price protection. It's the highest level you're willing to buy a stock or an ETF and the lowest level you're willing to sell an ETF. Place that limit at the current bid offer on screen and more times than not, you'll get execute sizes exponential to a product's average daily volume on a single print, on a single trade. It's quick, it's efficient. But just stress, if you have any questions about trading ETFs, I stress please call us on the ETF capital markets teams. Usually these discussions take two to three minutes and we don't hear from the client again. We explain how easy this is. We see that success. It's really gratifying from us from a cap markets team. We enjoy doing it. ETF trading can be intimidating to some, it really shouldn't be.
Jenine:
That's great. That's great. I know we're getting close to time, but I do like the fact that you pointed out a lot of what's on our console is some educated education materials with SMAs, ETFs, advisor approved, client approved, but visit our website, call our wholesalers. What would be your, before we wrap up, what are your key takeaways for our audience today?
Jamie:
Key takeaways, I think what you're going to continue to see in the ETF space is active, active, active. The secret is out. You're going to continue to see active products brought to market. And we did that word cloud.
Jenine:
Yeah.
Jamie:
It's getting confusing out there. There's defined outcome. There is buffered funds. There is enhanced income. There's single stock, triple lever ETFs, all of these are active, right?
Jenine:
Yeah.
Jamie:
What we do here at MFS is fundamental, active, core building block portfolios, cut through that noise, engage with MFS. We're here to add value over the long term. We've done it for 100 years. We're excited to do it for the next 100 years.
Jenine:
There is a lot of noise out there.
Jamie:
Sure is.
Jenine:
There is.
Justin:
Yeah.
Jenine:
Justin?
Justin:
I would say two things. One is the intersection of intellectual property, so the stock and bond picking that we do with technology. Tax management is not going away. Understanding tax management and tax alpha, in addition to what we all know of investment alpha is really important going forward. That's a takeaway. The other one is choose what fits for the client. The mutual fund is here. The mutual fund is okay. It is highly regulated, a great vehicle. That may work for certain clients and ETFs may work for certain clients and SMAs and CITs and offshore funds. And I could bore people to death with all the different vehicles that our industry has complicated for our advisors and clients. Choose the one that makes the most sense for that client, knowing that a value strategy or a growth strategy is a value strategy and a growth strategy just wrapped in a little bit of a different nuanced way and we can help you with those nuances.
Jenine:
That's great. And I think that's great advice. And I think the education is what's key in order to figure that out. I appreciate the time that you gentlemen with your fancy ties brought. I'm so thrilled you brought the tie back, but full disclosure-
Justin:
Ties back.
Jenine:
... If anyone thought this was going to be very formal session, as you gentlemen know that I'm going to share with the audience this morning, life is complicated and sometimes we forget things like our shoes. Today, for anyone who wants to know, I wore my slippers to work. Life is complicated. If we can make things easier, just lean into MFS and bring the experts.
Justin:
And I think we can simplify for you because we do work above them all.
Jenine:
We do work above them all, yes. Which I, if I had time, I should have hit it up before this live session. Anyways, thanks for joining us and I appreciate your time and thank you everybody-
Justin:
Thanks, Jenine.
Jenine:
... For tuning in.
Jamie:
Thanks, Jenine.
Justin:
Thanks everyone.
Jenine:
Have a good one.
Jamie:
Bye-bye.
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