Announcer:

Welcome to ETF Central, recorded here at the New York Stock Exchange, the home of ETFs. We're diving deep with the people shaping the space, the technologies driving innovation, and the stories behind the tickers. Whether you're an investor, issuer, or industry insider, welcome home.

Bilal Little:

Chandler, man, thanks for being here. I'm excited to see you. Tell us a little bit about when you first got into the ETF business.

Chandler Nichols:

Yeah, so going back to 2018, I used to work for a large mutual fund and ETF issuer at that time. And first off, that was my first job in the asset management industry. So I was really getting my feet wet and really trying to figure out exactly what I still wanted to do in the space. Graduated with a finance degree, was trying to figure out what to do with it.

So at that issuer I was on the sales desk, but actually more so from a support standpoint, so competitive analytics all the way to... I mean, it was one of my entry level jobs out of college, so I was even working with the mail room to help get materials to a conference that was an entirely different part of the country. So definitely my job was mainly to help support the sales folks who were out in the field.

Long story short, after really running all these different types of reports using Morningstar and Bloomberg, what have you, I kind of started to see the writing on the wall even back then when ETFs... I mean, they weren't "new" at that point, they've already been around for over 20 years, but in terms of their wherewithal and their inevitability to take mutual fund asset flows really stood out to me back then.

You run enough reports on X amount of mutual funds and ETFs and equity land and fixed income land, you start to realize, "Hey, not only is this fund having trouble not paying out capital gains distributions, but this ETF's also so much more cheaper. It's so much more low cost for the investors." So I realized then and there, I was like, "This is definitely a space that I want to be in bed with moving forward."

Mutual funds are obviously great and they do a lot for investors till this day. They still dominate the 401k market, for example, and they do offer a lot of unique solutions, but the ETF landscape, which at that time was still, I call it the golden age of smart beta, at that point it was really what segment of the asset management industry did I see... where was that segment of the industry going to be in five to 10 years from now? And where was I going to be in five to 10 years from now?

And really by the end of my time there, I really said to myself, "Hey, this is an industry I want to be in, not just for the next five years, but for the next 30 plus years."

Bilal Little:

Yeah, absolutely.

Chandler Nichols:

It's really fascinating in terms of what the ecosystem continues to offer. So, yeah.

Bilal Little:

Yeah. It's like you're always working in innovation within the ETF space, right?

Chandler Nichols:

Yeah.

Bilal Little:

There's constant evolution always taking place. My career has somewhat followed the ETF journey as well, so I totally get it, totally understand. So now in your current role as a product developer at Advisor Asset Management, how has your background driven you to where you are today? And maybe talk a little bit about Advisor Asset Management.

Chandler Nichols:

Yeah, a hundred percent. I'll just give a little bit of background on AAM first because we do a lot of different things, but to really kind of set the stage in terms of where the firm has been in terms of what we do now, we actually started out as a bond broker-dealer. Back in 1979 was when the firm was founded. Actually people here in 1979, they kind of think about today and high inflation and elevated interest rates. It's kind of interesting to kind of make that connection there.

And at that time, and still to this day, we're helping clients solve problems, not just by providing different types of fund structures, which we have a lot of different fund structures under our lineup today, but also down to the wire in terms of specific securities on the fixed income side that they might be looking to access, whether that be a particular bond they're looking to source or structured products, for example.

Fast-forward till today, we're a multipurpose asset manager featuring many different types of fund wrappers from SMAs, UITs, mutual funds, and now the ETF business. And really holding true to what we've built over the years in that asset management division has been really our wherewithal as a third party distributor for a lot of successful boutique investment manager, so offering access to investment managers that are boutique in nature, but world-class in terms of their expertise and knowledge. They are very well known in the financial advisor community, and we help them distribute their types of investment strategies through a particular fund wrapper that we feel is a fit. And we're doing this in the ETF side right now.

So that is where I feel like a lot of my expertise today kind of fits into this sort of mantra here at AAM of offering high alternative income solutions and risk management oriented growth solutions. Because I go back to my days, even when I first entered the industry, that was sort of the same type of mantra that they held with the solutions that they were looking to provide to clients during that particular time period in 2018.

The market environment in that particular time period was rising interest rates in Q4 of that year followed by lowering interest rates, but then going right into COVID. So risk management and high income definitely was of in need for investors back then. It still is today. So yeah, that's where I feel like what we offer kind of coincides with my experience in the space and where I feel like I've offered the most value to AAM in the short term, and hopefully we can provide some more value in the long term.

Bilal Little:

Just so I make sure it's clear for the listeners, so you guys actually collaborate and find boutique asset managers that need distribution capabilities and an efficient wrapper, in this case the ETF wrapper, and you help sort of crystallize that story for financial advisors?

Chandler Nichols:

Yes. From that standpoint, yes. And a lot of the strategies that we have now are actually they're currently existing clients in, say, the separately managed account space, for example. So those are like long-standing clients that we currently have products with. And to your point, yes, that's exactly what we look to do on the active management side of things.

Our ETF lineup also does have passive offerings as well, because at the end of the day we want to offer the best solution for clients in terms of where we feel, one, what's already being done in the marketplace? Is there an area of the market that we feel the current offerings may not be tackling that space well enough? And if that's the case, what's the role that we want to fill there? Do we want to come in with an active strategy with a well-known manager that can do what the space is yearning for? Or is something rules-based, more simplistic, a little more efficient for the end investor on that front?

Bilal Little:

Yeah, what's great about this is the market actually dictates what's going to be viable, and that's the best part about capitalism in many cases. But what's beautiful about what you guys are working on is there are so many talented money managers that might be offered in other wrappers or in other vehicles that may not have the commercial experience, not viability, but commercial experience to work with retail financial advisors and/or other people who might possibly buy the ETF wrapper. So your role is very important.

What is the one thing you stress to your potential buyers and/or clients when it comes to, "Hey, here's who AAM is and this is what we're doing for clients?"

Chandler Nichols:

Yeah. I always go back to the historical founding of the firm as a bond broker-dealer because I think that's a unique story. We didn't just start out purely as an asset manager. We started out on that side of the business. So we've always been attached to the hip of the financial advisor since the founding of the company.

So holding that mantra to today, we feel like we're offering those same capabilities as a multipurpose asset manager, still with the bond broker-dealer business, still with the structured product business. And, hey, we have ETFs, too, that can really help clients build out entire portfolios based on AAM solutions. We have a full faceted lineup of ETFs that cover multiple different types of asset classes in the equity and fixed income landscape. So that's where we feel like we offer the most value. And again, kind of going back to the active and passive nature of our lineup, it just offers more choice to the end investor in terms of what can potentially be a fit into a client portfolio.

Bilal Little:

Yeah. No, this is good. So then let's talk about portfolio construction, because I think this is the transition point. I think most ETF issuers, of what I've seen, they tend to list a product in market. What they haven't done really well is communicate the value of that product in the context of a portfolio. How are you guys doing that for clients going forward, I guess?

Chandler Nichols:

Yeah, yeah. And I think this brings me back to even just as another part of my career that was really interesting, COVID-19. Rates were close to basically zero at that point. It was crazy. You had treasury bill funds with negative SEC yields because the income was lower than the expense ratio. It was that crazy in terms of what investors weren't able to receive from the less riskier areas of the market.

So unfortunately during that time period, some investors had to potentially either increase credit risk or increase duration risk to hit their prior income target goals. And during that time period, I was spending a lot of time with financial advisors with using alternative income solutions, whether that be on the preferred side or option income strategies or just alternative credit sectors that you could potentially take parts from both, equity and fixed income, and make room for an alternative income solution in regards to the over client portfolio mix.

And at AAM we take that exact approach. We work in lockstep with our clients in order to make sure that the solutions that we're looking to discuss with them are a potential fit based on what their client's actually looking for in their portfolio. And I think income's definitely still resonating with clients. So that is a common type of request that we still hear, is a lot of investors are still looking to hit their age-old target income goals, whether that be 4%, 5%, or even 7%.

And also honesty also breeds positivity as well. Sometimes the solution that we have might not exactly hit that target income goal, but we also need to make sure that the risk profile is still relatively intact to what they had before in their prior portfolio sleeve as well that we're looking at. So a lot of it comes to analysis and realization and being able to tell them, "Hey, look, we think we can do this, but you might be taking on too much risk, just to be honest, with this specific ETF. Here's something else that we have that might be able to help offset that risk, offset this level of risk in your particular equity sleeve that maybe can help you really round out the overall portfolio."

So I think a lot of it is being a service provider to clients. It's not just having products on a shelf, it's also about being a service provider for our clients.

Bilal Little:

Yeah, I love that. Look, I've spent 19 years in sales and distribution, so I've spoken directly to financial advisors around this conversation, and it's usually trying to get them to understand that there's a unique value outcome and proposition associated with the exposure in said product. And what we try to get them to think about is, where should we source to readjust the portfolio? Because what happens is people feel very confident and comfortable in their equity allocation. They usually don't feel as good, has been my experience, about their fixed income allocation.

I know you guys excel in the fixed income space. Talk a little bit about what you're sharing with clients right now because fixed income is still a viable option for people.

Chandler Nichols:

Yeah, a hundred percent. So on the fixed income side, we do have one newly launched ETF in the fixed income space. LODI is the ticker symbol. It's the AAM SLC Low Duration Income ETF. And this is one that we're really excited about because it's our first ETF with our affiliate company, SLC Fixed Income. And they are the subadvisors on this particular ETF and they have a vast amount of experience in managing institutional fixed income assets.

Bilal Little:

Where are they from?

Chandler Nichols:

They are based out of Manhattan.

Bilal Little:

Oh, okay.

Chandler Nichols:

SLC Fixed Income, yeah. So they manage over a hundred billion dollars worth of fixed income assets on both the combined when looking at both public and private fixed income. And essentially what we did was work with them to bring one of their institutionally driven strategies into the ETF wrapper, again just democratizing access for the common retail investor, financial advisor to get access to an institutional grade strategy.

And what I really, really like, what we really like, about LODI is actually the simplicity of it. Because there's really two ways, obviously, you can potentially get alpha generating and inflation adjusted return potential in fixed income. You either take on duration risk or credit risk. Well, on the duration front, again, low duration's in the name, so you'd have to assume that that's what we're doing there. But more specifically, we are hugging the benchmark in terms of when it comes to the duration side of things. So it'll typically fluctuate anywhere from one and a half to two years, really short out of the curve.

Where the value add is mostly found is on the security selection side of things. This is a bottoms up, fundamentally value driven strategy where the portfolio managers, they are less constrained to the benchmark in terms of the sectors they can allocate to. So naturally corporate credit's a part of that portfolio, also mainly investment grade portfolio, but they can invest in other sectors like CLOs, mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, the securitized asset segment of the fixed income market, which is where a lot of value can potentially be found in terms of not just generating positive total returns for the end client, but also potential yield enhancement as well in terms of what those structures can potentially offer.

Again, it's an investment grade portfolio, so rarely straying into the high yield segment of the bond market. So that's one that we're really excited about because, look, rates are high and the short end of the curve in general just still looks really attractive versus a couple years ago. So a lot of investors are still pretty comfortable with money market or money market alternative exposures. I mean, can't blame them. But over the long term, naturally, one conversation that we do have with clients is, "Well, how are you keeping up with inflation? How are you going to keep up with that in the long term staying allocated to just treasury bills? Or, again, just like money market alternative instruments?"

So that is a conversation we've been having a lot with advisors. Basically, "Hey, take maybe one step out on the curve, stay investment grade to..." LODI's portfolio is investment grade, typically from a credit quality standpoint is anywhere in terms of its exposure is mostly in that single-A to triple-B landscape.

But again, when you have a portfolio management team from SLC Fixed Income really hawking a portfolio in the market every single day in terms of what is out there from a positive spread opportunity in the securitized space, that's where they've been able to generate a lot of alpha in this particular strategy.

Bilal Little:

Yeah, I'm excited to have you on because this conversation actually is not being had enough, in the sense of most people, their first investment is a CD, to your point, or they stay very conservative in the money market or something that's very liquid. Taking a step out, obviously trying to factor in what inflation looks like to the overall portfolio is critical. But I also believe there's another opportunity to actually have sourced, and this year is a perfect example, to source some of your conservative equity allocation and actually de-risk the portfolio because of the math association with loss.

And what I mean by that is, if you were coming into the beginning of this year and you saw the market and we started talking about tariffs around obviously the political environment, and you knew, which obviously no one has a crystal ball, but you had privy into understanding that volatility was coming back, no one was excited that their growth equity was down 20 plus percent. But they could have allocated a small portion into conservative fixed income, which would've allowed them to still hold a portion of their equities, fine, but source some of that into high quality fixed income. In this case, the front part of the curve would've been a great source for people to stay invested, have a diversified portfolio, but obviously still stay in the markets.

Chandler Nichols:

Yeah. And to that point, preferred securities has been another area of the market that we've been really concentrated on too. You mentioned conservative equity, that's definitely been a conversation we've been having regarding that particular asset class.

Because one thing, I think a lot of people will lump preferreds with fixed income. Which makes sense, they get credit ratings, they have interest rate risk, they have embedded options, but they do share equity-like characteristics as well, and their volatility tends to hover in between that of fixed income and equities depending on whatever strategy or particular preferred you might be looking at.

But overall, that's been another conversation we've been having with clients. Preferred securities, for example, are typically issued by large financial institutions. Now, common equities in the financial sector have been pretty good, but for investors that are looking to potentially de-risk that particular sector of the portfolio, preferreds could potentially be a way that, at least from our client conversations, where de-risking could potentially take place.

Because again, you're able to keep consistent dividends and you can still get some of the... I mean, preferreds offer the potential for qualified dividend treatment as well, similar to common equity. So the potential, not a tax expert, but tax benefits that could potentially be had in the preferred market relative to just broad fixed income is, again, kind of talking about conservative equity allocating, that's definitely an area of the market that we find to be pretty attractive as well.

Bilal Little:

What's been the pushback on the preferred side of the conversation?

Chandler Nichols:

Sector concentration for those who are looking to really pivot maybe a fixed income sleeve and really reallocate to a preferred strategy in general. One thing that we do tell them, because this does come up a lot on the preferred security side of things, a lot of investors will lump high-yield bonds with preferred securities in the same conversation. A lot of them do tend to be in that double-B credit range, and they tend to be in that high yield credit range, but a lot are investment grade as well. And we tell them, "Hey, look..."

I mean, it depends on the strategy, obviously like active, passive. If it's a strategy where what we've seen on the passive side of things is what would you want exposure to? Do you want exposure to the preferred equity of JP Morgan or Wells Fargo or Morgan Stanley? Or do you want exposure to, say, a party city bond on the high yield front?

And when it comes to the overall lumping these sort of asset classes together, again, it takes careful risk analysis as well because another thing, to be fair, is high-yield bonds are typically less volatile than preferred securities. That tends to be the case. And it comes down to what's the benefit that the client is getting by taking on this extra risk on the preferred side of things? And concentrating some of their sector exposure into financial institution issuers, or utilities issuers as well, it's where a lot of the preferred market tends to lean as well.

So yeah, again, it comes down to really setting the record straight and not just being a product issuer, but also a service provider and just having those kinds of conversations in terms of, not just what they're getting, but also answering the question, even before it's asked sometimes, what are the risks? What type of market event could potentially result in elevated volatility in some of these asset classes?

Bilal Little:

What are you guys watching for the summer as far as some of those volatility potential levers?

Chandler Nichols:

In terms of the market side of things, our base case has been, call it stagflation lite, elevated inflation still, slowing growth but still positive, so not like... That's why we're calling it stagflation lite. So we feel from that standpoint, investors might want to prioritize coupons over cash and really potentially taking a look at income-driven investments, whether that's equity income from high dividend payers or preferred equities, and potentially taking a step out on the curve, taking a step out in terms of credit risk and potentially pivoting, say, a more riskless portion of a cash portfolio and looking to a more cash plush strategy in terms of the short end of the curve.

And also from a core portfolio as well, we think from a duration standpoint, our CIO team has been touting the short to intermediate end of the interest rate curve. The long end is still highly volatile. It's been pretty choppy, even, since the beginning of the year and even since the US presidential election. So we feel that short to intermediate bonds are definitely an area that could potentially be attractive for the end investor. And yeah, we think that's pretty much where investors should be looking at right now.

Bilal Little:

I love it. When you guys are spending time with your clients right now, what's the most pressing question they ask you?

Chandler Nichols:

Yeah, on the ETF front it's all about liquidity. So in our ETF lineup, we have some ETFs that are on the smaller end in terms of AUM and trading volume, and a lot of it comes to having that discussion in terms of what's the difference between trading volume, the bid-ask spread, and now we're bringing in new jargon to some financial advisors, so you have implied liquidity.

Well, what is implied liquidity? What's an authorized participant? The ETF industry has been around in the US since '93. These conversations are still being had. So it does take constant education with financial advisors to understand you can potentially place a significant trade into a small sized ETF based on what the underlying assets are being held inside of the portfolio. If it's a US equity large cap portfolio, like let's say it's a basket of Dow Jones Industrial Average stocks, I don't think APs or market makers will have too much trouble trading and being able to create new shares.

Which is another facet of the conversation, even like communicating the fact that ETFs are open-ended funds where new shares can always be created, whereas for stocks, trading volume for closed end funds, trading volume tend to be the dominating factor of liquidity because they're obviously closed end in nature in terms of share issuance.

So those are definitely conversations we still have with our clients today.

Bilal Little:

So there's 4,200 plus ETFs in the market. The market is now over $11 trillion. It's growing considerably. Active ETFs that launch in the market are somewhere around 80% of the new launches. This evolution continues. I'm always curious to know, in your lineup you represent a lot of different managers, what's that one underdog in your lineup that people don't know about that you are always like, "You know what? This is something that we should pay attention to because we should be talking more about it." Which one is that?

Chandler Nichols:

Yeah, so I would have to discuss our relationship with Brentview Investment Management. They currently manage the AAM Brentview Dividend Growth ETF, BDIV. And again, it's an active dividend growth, US equity based strategy. And they have a vast amount of experience in dividend growth investing for many decades managing institutional money. They were previously known as... some of the audience might be aware of a company called Santa Barbara Asset Management. That was Brentview Investment Management.

Bilal Little:

Oh, wow.

Chandler Nichols:

Yeah, the same founders of that firm, currently they work at Brentview Investment Management right now. And the reason why we really like this strategy is because relative to what we've seen on the passive front... On the passive front, a lot of the indexes that are being built on the dividend growth side, they typically stick to one thing and that's the history of dividend growth. "How many years has X company grown their dividends?"

We'll maybe throw a value screen or some kind of other quality screen on top of that, and we'll screen companies out that don't fit that criteria. They have more flexibility, obviously, as an active manager to not just choose those types of companies that are pretty attractive still, but also the new dividend initiators as well. I mean, there are some companies only the past few years that are significant large cap companies that have recently initiated a dividend that Brentview might be taking a look at to add in the portfolio.

There's obviously other factors that drive their investment decision making as well, such as targeting a lower beta towards the S&P 500 and achieving a higher dividend yield relative to the S&P 500 as well. So we feel having that active management component of a dividend growth strategy can allow the investor to get more nimble exposure in the dividend growth ecosystem. So we feel Brentview definitely offers a really significant strategy there.

Bilal Little:

Chandler, I appreciate you coming.

Chandler Nichols:

Yeah.

Bilal Little:

You nailed it. Thank you.

Chandler Nichols:

Thank you.

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