Graham Day lives on the corner of individual small businesses and industry-wide revolution. As the VP of Product Development and Research at Innovator ETFs, he is a finance expert set on making exchange-traded funds (ETFs) simpler and more accessible for both investors and financial advisors. Graham kindly took some time to interview with Advice Chaser. Here’s what he has to say about his career and ETFs as the future of investing.
You have a wide range of experience in investments. What interests you about ETFs specifically?
During my junior year of college, I was looking for an internship, and someone had mentioned to me that a firm called PowerShares was looking for interns. They were an investments firm. Numbers and finances had always intrigued me, so I applied. I got the internship and enjoyed working there. After I graduated, they offered me a full-time position. One of the things that impressed me during my time at PowerShares was this entrepreneurial spirit. You can be a small company and add a lot of value for investors—you don’t have to be a huge firm. Some of the best ideas come from really small firms. Whatever risk I took in my career, it was never the same as these entrepreneurs. They are putting their entire personal wealth on the line because they believe in what they’re doing. I admire that so much. That’s a different level of risk. That’s why enjoy working with these smaller firms and startups. You can see these smaller businesses grow. Then in 2014, I joined a startup called Elkhorn Investments for about three years. There, I learned firsthand a lot of the challenges faced by startups that are trying to get investors. ETFs are really the perfect combination of helping businesses grow and helping investors reach their financial goals.
What are some changes you expect to see in ETFs in the next five years?
I think there are two main ways that ETFs will be changing the market soon.
- We really believe that defined-outcome ETFs are the future. That way, you can know before you buy what kinds of returns you can expect. Whether the market goes up 10% or down 20%, you know exactly what range you will be in. People are willing to give up some upside potential for certainty. People don’t want huge risks. They don’t want to wake up in the morning and find that their portfolio is down 30%. I believe that we will see huge growth in this defined-outcome investing space because people value the ability to financially plan their future. Some of our biggest investors have already made their money. They’re not looking to make a ton more money; they’re just looking to keep what they have. They’ve already taken all the risks in their careers. They don’t need to hit home runs, they just need to hit singles and doubles. Defined-outcome ETFs give people more control over their financial futures.
- Another huge area of growth we’re seeing is in thematic investing. Especially with younger investors, people aren’t interested in investing in a particular size of company or in mid-cap exposure. That means nothing to them. But when they say that they’re interested in investing in frontier technology, or clean energy, or sustainable water practices, we can absolutely create a themed portfolio for that. It’s also a new way for advisors to better connect with prospective clients. Advisors can create a personalized theme of ETFs that support industries that the investor cares about and is interested in.
What are the advantages of defined-outcome ETFs over defined-outcome investing in general?
Defined-outcome investing has been around for decades. However, most people haven’t used them much because of the complicated wrappers that they usually come in. We won’t say that we created defined-outcome investing, but we will absolutely say that we created defined-outcome ETFs. Banks, insurance companies, and annuities have been doing this for a long time, but when you take the payouts, like a 15% buffer on the NASDAQ 100 and you put it in an ETF wrapper, you eliminate a lot of the headaches that financial advisors have with banking products, like credit risk. ETFs are also more tax efficient. There are no capital gains distributions here. There’s a liquid secondary market for these, just like the largest ETFs in the world. This makes it easier for both advisors and investors. ETFs don’t have the surrender charges and commissions that kept ETFs limited to the huge companies and extremely wealthy, risky investors. It’s much more accessible in an ETF wrapper.
How will the defined-outcome revolution impact investors?
Historically, ETFs have been mostly focused on trillion-dollar businesses. There are bonds and stocks and a lot of options available to them. But we felt that they were lacking risk management. There are a lot of investors who don’t want to take full-market risk. Today, that could be someone who is a retiree. They want to focus on wealth preservation, not necessarily wealth gain at this point. They need a strategy they can depend on in a down market. Or sometimes people are concerned that the market is so high right now and they don’t want to buy in just to see it crash. They want a built-in downside buffer for their clients. Our pre-defined investment buffer has a cushion. This risk management area didn’t exist for ETFs before. Investors were left to hope that the market would protect you in the future; that any downs would balance out. But a lot of people want stability. Our defined-outcome ETFs offer that peace of mind. In exchange for that buffer, you cap your upside potential, but you can still stay in the market and you have protection when the market inevitably falls.
Part of your mission is to bring more certainty to the financial advisement process. What’s something you wish people understood about investing and working with a financial advisor?
We are big believers in having a financial advisor. There’s a reason these are full-time jobs. Sometimes people’s attachment to their money and their fears hinder their ability to see risk clearly. The biggest value add that an advisor provides is they remove emotion from the equation. They stop you from making poor decisions that often plague investors. This isn’t even necessarily referring to people who are buying high and selling low; I’m talking about people who say, “I’m going to wait for the market to correct and go down—then I’ll invest.” We find that when people sit on the sidelines and wait, they never find an opportune time to invest. They end up wasting so much time. But an advisor has a long-term view. And an advisor also understands taxes. Using a tax-loss harvesting strategy is so much more efficient. It’s one of the easiest ways for investors to add alpha to their portfolios. But you need someone who’s going to spend the time to dig into your specific situation and understand how you can more tax-efficiently invest. That in itself more than pays for a financial advisor every year.
