Trust in active management, built to match indexing's growth.

The basic operational components that will challenge indexing are:

1. Create a Suite of Active Multi-Manager ETFs.
2. Use ERISA’s fiduciary standards for each operational step.
3. Select an outside PM research organization to perform all required research, monitoring, evaluation, and replacement of the ETFs’ portfolio management firms.
4. Discourage competitors by creating a moat around this Suite of ETFs.

These four operational components provide:

• the swiftest method to create a suite of active multi-manager ETFs (using 3rd party research),
• the highest quality suite of active multi-manager ETFs (ERISA standards),
• the least expensive ETFs to launch: (a) manager research is a variable cost in bps., (b) selected portfolio managers will duplicate their model portfolios,
• the least expensive to operate in the long term (e.g., no in-house PM research team salaries, benefits, bonuses, office space, and travel expenses),
• a structure that allows expense ratios to be in Morningstar’s lowest quintile.

To help the ETF sponsors keep the expense ratio very low, well within the lowest fee quintile in Morningstar’s data for similar ETFs. To swiftly attract assets, and to engender immediate trust, the ETFs must be competitive with indexed ETFs.

No. To retain the exclusive license, instead of an additional fee, there are ever increasing AUM levels that must be achieved every several months. The Fiduciary ETFs are meant to be low cost to the ETF sponsor, with little upfront expense, and low annual operating costs. Our intention is that the savings would be used for a carefully designed marketing and sales campaign that swiftly brings in large amounts of assets, growing exponentially.

The multi-manager structure allows each ETF to invest with several top-rated portfolio management firms. Continual monitoring provides the means of using the best, always. Selection of several PMs in the same investment space requires analysis of the differences, to minimize security overlap. When there are five to ten portfolio management firms investing in one strategy, minimizing overlap allows for investment of a very large amount of assets. This is achieved using outside research organizations with large analyst teams that have detailed knowledge of each investment service they cover. The multi-manager structure is equally good for the suite of ETFs and for dual-purpose ETFs.

In U.S. law, the highest fiduciary standard is ERISA. ERISA is a process driven law. Following proper processes at every step is required. ERISA compliance is not based on outcomes. It’s based on following proper procedures, to “do the right thing” always. To grow actively managed assets to the scale of indices, ETF sponsors need to win the trust of institutional and retail investors. During the past century of mutual fund sales, investment firms all claimed to be better than everyone else. The result is skeptical investors. Fiduciary ETFs are designed to deserve the greatest trust.

ERISA demands an exhaustive process for portfolio manager selection, monitoring, evaluation, termination, and replacement. ERISA’s standards are 50 years old. They have been tried and tested, proven excellent, and trusted by the most respected institutional investors. Because Fiduciary ETFs operate with the highest standards demanded of fiduciaries, clients will have the courage to remain invested for the long run.

Anyone wishing to view bullet points about aspects of ERISA’s process, may start with a search for “ERISA requirements for portfolio manager searches and monitoring for Defined Benefit plans.”

Funds that invest for ERISA pools often operate so that they are just within the legal minimum to avoid lawsuits. To gain maximum trust with institutional and retail investors, we recommend maximum efforts to operate the strongest fiduciary process of every investment step and process. Fiduciary ETFs’ pending patents do not require going to extra fiduciary lengths. Don’t just avoid ERISA’s legally permitted conflicts of interest, make extra efforts to document objectivity in every step and every process. To achieve the greatest trust from institutional and retail investors, we recommend operating with processes and procedures that we call Extraordinary ERISA.

Yes. Following ERISA’s best-in-class processes serves a protective purpose for both your clients and your firm. The most responsible process of investment should include these best-in-class processes for portfolio manager selection, monitoring, evaluation and replacement.

Yes. By adhering to extraordinary ERISA’s processes, the active multi-manager ETFs can be best-in-class for every investment style, objective and mission. These ETFs will maintain (perhaps enhance) a firm’s high reputation for integrity, quality and innovation. Outside research organizations can provide data on their track record with selection, monitoring, evaluation and termination of independent PM services.

Speed, high quality, and low cost are our priorities. As you know, outside PM research organizations already perform deep and broad portfolio manager research, monitoring and continual evaluation. Once your PM research partner is selected, you can move swiftly, knowing you will secure the best PMs for every ETF sleeve, and do this with a minimal variable expense that is part of the expense ratio.

There are several reasons to hire one or more outside PM research organizations.

1. Objectivity: it is important to be able to state that you are objective. Hold a competition to find the best independent PM research organization(s) to be objective and document your objectivity.
2. Trust: Trust will be earned by conducting a competition for the PM research role. Objective selection of an independent research firm allows your new suite of active multi-manager ETFs to reach the highest level of fiduciary excellence.
3. Swift Launch: hiring an independent research organization allows your suite of active multi-manager ETFs to be ready for launch immediately at peak capacity.
4. Inexpensive: Outside PM research organizations allow for almost no up-front expense and no additional fixed overhead for a large PM research department. The money spent for the outside research organization is a variable cost that will be a small part of each ETF’s expense ratio.
5. Your PM research staff already work at peak capacity and cannot start to research hundreds of new PM services. They have enough to do.

You should select an outside PM research organization that already has all the in-depth research done and already monitors several hundred portfolio management strategies. Such organizations have long track records of the success of their PM selections. Good research partner candidates will have at least 50 dedicated research analysts and an equal number of people providing support and supervision. The PM research analyst position should be a full-time career path profession. High quality research firms will limit their analysts to covering about 20 portfolio management services (not firms, just single investment strategies).

Yes, you can make much more money. John Bogle was asked the same question half a century ago when he started Vanguard. Vanguard never promised to beat the performance of other funds. Vanguard simply told people the average market returns are enough. No one had to believe they had found the best performing funds. They needed to believe someone was on their side, would be honest, and would provide normalcy. The same things are provided by the suite of active ERISA-driven multi-manager ETFs and dual-purpose ETFs. We expect the result to be large asset flows into Fiduciary ETFs.

No. It’s “no” if you think like American Century creating Avantis as a suite of ETFs operating between active and passive ($150 billion Avantis, $150 billion legacy funds, totaling $300 billion AUM). It’s “no” if you think like BlackRock going big in indexing ($9.3 trillion indexed, $5.7 trillion active, totaling $15 trillion AUM). American Century and BlackRock provide good examples of how to develop a new business so that all your businesses flourish. Fiduciary ETFs are a significantly different business. You are adding a new profit center.

Yes, this is innovative. Today, no ETFs publicly state that they follow the ERISA fiduciary process, even though ERISA standards are sought by all U.S. Defined Benefit pensions, as well as the best-managed and most prestigious endowments. There is no suite of active ERISA-driven multi-manager funds or ETFs. Your firm can quickly launch a suite of active multi-manager ETFs across the investment spectrum with outside research organizations’ existing research. Dual-purpose ETFs provide several innovative features that will win assets from all investors. Grow active ETF market share by following ERISA’s well-respected standards. Let the world’s investors know you’re doing this for them.

Your firm will stand out from the crowd of active ETF sponsors by operating a suite of active multi-manager ETFs at the highest standards demanded of fiduciaries, as well as for dual-purpose ETFs. Broadcast this proudly. Your firm should lead today’s revolution in investing.

Indexing is being questioned in the financial press and academia. Now is the time for a full suite of active ERISA-driven multi-manager ETFs to complement index funds. Investors can believe in these Suites of Active Multi-Manager ETFs, because the ERISA process has already earned the highest respect and trust over more than half a century. Dual-purpose ETFs, in one example, allow you to provide many benefits that institutional and retail investors seek right now.

Yes, by exclusively licensing the 2025 patent filings covering multi-manager ETFs that operate using the processes demanded by ERISA, and dual-purpose ETFs. The pending patents should discourage other firms from copying your ETF suite and the dual-purpose ETFs. Our Intellectual Property attorneys can discuss the content of the pending patents whenever your attorneys deem appropriate.

Patent filings often take years before being denied or approved. If the patents are denied, then your firm will have no legal issues from offering ETFs with an expense ratio that is 1 basis point lower (by not paying the annual licensing fee of 1 basis point). The fee is a variable expense built into the expense ratio, not an upfront cost. If your firm infringes on approved patents that are assigned to a competing firm, then your firm’s years of work are at risk of patent infringement litigation. Consider the 1 basis point annual licensing fee as inexpensive insurance (paid by the investors) against future infringement litigation, should the patents be approved.

Decumulation funds are investment pools that have an obligation to make periodic payments. The obligations may be legal requirements (defined benefit plans, foundations), budgetary necessities (endowments for such institutions as universities, museums, libraries, hospitals), or moral duties (trusts). Decumulation funds get little attention compared to accumulation funds. They have very different needs and risks. They must focus on fulfilling the mission of the money.

The largest U.S. asset pools are decumulation funds, with institutions that continually make payments while their investments grow. Their requirements to make payments and grow are underserved. These funds provide a path for quick acquisition of large AUM because the money is concentrated. In the U.S., $16 trillion is held by 277 decumulation pools. In the 55 largest decumulation pools there is $13 trillion. Start a marketing and sales campaign here.

Some examples of decumulation pools (2024 data):

• Corporate Defined Benefit Pensions: $1.3 trillion in 100 largest; $300 billion in 6 largest
• Public Defined Benefit Pensions: $5.46 trillion in 100 largest Plans; $3.5 trillion in 26 largest State DB Plans (> $50 billion for each State)
• Endowments: $400 billion in U.S. top 5 > $50 billion
• Foundations: $156 billion in U.S.’s top 2 private > $50 billion
• Health Care Foundations: $126 billion in U.S. top 2 > $50 billion
• Insurance companies: $3.75 trillion with U.S. top 6
• Mutual Funds: $4.77 trillion in top 6 active equity mutual funds (for Dual-Purpose ETFs)
• Family Offices: $156 billion in U.S.’s 2 with > $50 billion each

Decumulation pools will welcome dual-purpose ETFs and the suite of active ERISA-driven multi-manager ETFs.

Decumulation funds are run by people who must view their mission in decades. They understand market cycles, and the value of PMs who are out of favor but will do great when the market favors them again. They are not like Defined Contribution (DC) plans, whose trustees face litigation if they retain PMs who lag market indices over the past few years. Litigation has turned DC plans into finicky investors who fire managers and replace them with the most recent standout funds. Decumulation pools provide an opportunity to win investment clients who understand markets and think in decades.

Let’s provide a tamer Wall Street. The S&P 500 Index funds have been through 50% declines once or twice in each recent decade. Other index funds declined more.

Fiduciary ETFs provides a trustworthy structure that allows us to provide less-volatile investments. That is helpful to institutional decumulation investors, and for retail investors who want to ride a milder roller coaster. Together, let’s serve the unmet need.

Active mutual funds and ETFs are sold much as they were in the 1960’s. It’s time for innovation that deserves trust from all investors, and grows AUM at the speed we have seen with index funds.

Past dual-purpose funds were all closed-end funds (CEFs). They existed in the U.S. from the 1960’s into the 1990’s. That period’s most famous fund manager, John Neff, managed Wellington’s two dual purpose funds, Gemini I and II along with Wellington’s Windsor Fund.

Many prestigious firms issued dual-purpose CEFs, including Merrill Lynch, Oppenheimer, Putnam, Scudder, Vance Sanders, Lehman, and Wellington Management.

The Tax Reform Act of 1986 ended these CEFs by requiring that all series funds issued by a mutual fund have proportionate taxation for all sources of income and gains.

Fiduciary ETFs’ pending patents were specially designed to provide the way to comply with U.S. tax law while bringing back the features and benefits of the past’s dual-purpose CEFs. We recommend that a new issuer of dual-purpose ETFs seek a private letter ruling from the IRS stating that an Income ETF will be taxed only on income, and a Growth ETF will be taxed only on capital gains.

The structure is built on four parameters, outlined here in one example of a dual-purpose ETF:

1. Two complementary ETFs (e.g., an Income ETF and a Growth ETF).
2. Both ETFs invest equal amounts in a single underlying portfolio. Duplicating an existing fund’s or ETF’s holdings works well, as does the ERISA-driven active multi-manager process.
3. The portfolio’s features are intentionally divided UNEQUALLY between the two ETFs (e.g., the Income ETF receives all the portfolio’s income and pays all expenses, while the Growth ETF receives all the portfolio’s appreciation and bears no expenses; initial leverage of 2x is created without loans or derivatives).
4. Build a Moat around the ETFs with the license for the dual-purpose ETFs (fee is 1 basis point of AUM per year).

In this example, structured to provide the benefits of Wellington’s Gemini I and II dual purpose funds, assume initial investors buy equal dollar amounts of both ETFs. Also assume at issuance that the Income ETF is scheduled to terminate at a predetermined maturity date (e.g., 15 years) when the Income ETF returns the original issue value to its shareholders; at termination of the Income ETF the Growth ETF retains all remaining assets and capital gains.

• At inception, 2:1 leverage with no fees, and no loans or derivatives.
• 2:1 leverage initially on ETF’s price when the two ETFs invest equally in the single portfolio. NB: Leverage changes as a result of portfolio gains and losses.
• Like an option on the price movement of the portfolio because its leveraged price appreciation trades in the secondary market separately from the Income ETF. Options and Futures have greater risk due to their shorter termination.
• No margin calls, which reduces risk normally associated with 2:1 leverage.
• Institutions can invest in safer leverage: Many institutional investors are prohibited from investing in derivatives, such as options and futures, and many are prohibited from leveraging through margin.
• A useful alternative to riskier investments for institutions seeking speculative sources of increased upside.
• Relatively high security for a leveraged investment.
• No fees: most competitive; speculative investments aren’t even close (e.g., 2 and 20 hedge funds; other leveraged ETFs).

Net dividends doubled, dividends continually increase, termination returns initial Income ETF share price.

• Dividends are double the portfolio’s net dividend rate, as all dividends accrue to this ETF.
• Pays expenses for both ETFs from cash flow.
• AAA credit rating is likely from Moody’s, S&P, Fitch, and NAIC at initial offering.
• Flexibility of legal structure joining the two ETFs in management of the single portfolio.
• Sustainable large money flows: basic to the portfolio strategy for decumulation funds.
• Income grows faster than average U.S. inflation: basic to the portfolio strategy for decumulation funds.
• Cumulative cash grows exponentially.
• High security for principal.

In this example, the 2 ETFs invest equally in a single portfolio of stocks of financially strong companies that pay above average dividends that are increasing faster than inflation.

• The equity allocation intentionally differs from the S&P 500’s.
• The greatest advantage for institutional investors comes from equal initial investments in both ETFs. Conservative institutions holding both ETFs will conform to their Investment Policy Statements.
• No surprises in the portfolio and its behavior.
• Unlike many hedges, the portfolio’s market characteristics are well known.

Once invested, they could keep both ETFs or sell one. If a market period occurs in which high income is prized, the portfolio will rise and the Growth ETF will have a large gain amplified by the leverage. If the portfolio is up 20%, Growth ETF’s leverage could as much as double that gain to 40%. The investor could sell the Growth ETF and keep the Income ETF. In the above example where the portfolio’s net dividend rate is 2.7%, the Income ETF continues to receive the leveraged dividend rate which initially is 5.4%.

Key benefits of this example include:

• Realize Gains while Keeping the Leveraged Income Stream: In the secondary market investors can sell the Growth ETF, which represents half of their initial investment, to realize all capital gains while continuing to receive the full original income stream from the Income ETF.
• Enhanced income: The Income ETF’s starting yield is twice the net dividend rate of the underlying portfolio. If an ETF had a 2.7% net yield, that would double to 5.4% for the Income ETF shareholders. This is a very high yield from common stocks. Unlike bonds, the income can be expected to continually increase.
• Amplified growth: The Growth ETF’s initial performance is twice that of the overall portfolio. For example, if an ETF’s 1-year annualized return increases from over 7.0% to about 14.0%. Note: the ratios change as the portfolio grows over time.
• Loan-less leverage: The initial 2:1 income and growth ratios occur without the use of loans or derivatives. This difference permits the new ETFs to be used by institutions to invest aggressively, when previously they couldn’t use leverage if their investment policy statements prohibited margin or derivatives. Such institutions can then use liquid ETFs instead of seeking illiquid private equity and private credit.
• Efficient to launch and profitable to manage by duplicating an existing portfolio. The structure can be built on your existing active or quantitative strategies, offering cost efficiency, familiar investment behavior for modeling, and the possibility of using an existing track record in sales material, with Morningstar, FactSet and ratings agencies (the Income Shares deserve a AAA credit rating). This is also true when using the active ERISA-driven multi-manager process.
• Exclusivity Moat: The 2025 pending patents cover investment companies with complementary objectives investing in a single portfolio.
• Swiftly attract large investments from decumulation investors: the dual ETF structure will appeal to the largest investors, all with obligations to make periodic payments, such as defined benefit plans, endowments, and insurance companies. In the U.S. just among 39 large decumulation institutions there is $8.5 trillion invested, and each of these institutions has over $50 billion in assets. They could be among the first contacts during the initial offering. They will be best served investing equally in the Income and Growth ETFs.

The dual-purpose ETFs provide a safer way to invest. The Income ETFs provide high income, as rising income from common stocks is safer than fixed interest from High Yield bonds. The Growth ETFs provide a speculative stock investment that is liquid, and safer than investment bought with loans, margin, forex carry, and derivatives. Note that the shorter the time to termination of the Income ETF, the greater the market risk for the Growth ETF.

In the example of Income and Growth ETFs, the Income ETF deserves an initial AAA credit rating from Moody’s, S&P, Fitch, and the NAIC due to its 15-year term.

FACTS about the S&P 500 without dividends reinvested:

• In the past 90 years never had a loss at the end of any 15-year period.
• In the past 125 years never lost half its value at the end of any 15-year period.

IMPLICATIONS:

• The rising income stream of the Income ETF is extraordinary considering its security for the return of principal. This ETF transforms high dividends, normally risky from high yield stocks with low credit ratings, into a AAA-quality source of high income rising faster than inflation.
• The Growth ETF has a reduced probability of substantial loss at the 15-year termination date compared with investments using margin, loans, forex carry and derivatives.
• Rigorous selection of portfolio managers increases the probability of the ETFs meeting their objectives.

Source: Crestmont Research Stock Market Matrix, S&P 500 Index without dividends, www.CrestmontResearch.com

While bonds provide safe income and principal over a short period of years, long-term income and protection of principal is most likely to come from common stocks. The best source of reliable & sustainable income is dividends, from companies that are financially strong, growing revenues, and committed to paying dividends.

Rigorous selection, monitoring, and evaluation of portfolio managers is especially valuable.

Source of Dividend Data: Research Affiliates’ newsletter, “Fundamentals”, article by Rob Arnott, Institutionalizing Courage, page 2 Table 1, May 2012.

Let’s look at 2 scenarios for this example, which has the Income ETF terminate in 15 years, leaving the Growth ETF with gain and loss possibilities. In scenario one, the portfolio has doubled in ten years. In scenario two, the portfolio falls to half its initial share value. Assume $500 million is initially invested in both ETFs.

Scenario One: Portfolio gains ~10%/year (U.S.’s market average) with 15-year term of Income ETF.

Here’s how it works.

• Income ETF $500 million + Growth ETF $500 million = $1 billion initial portfolio value.
• 7.2%/year portfolio market growth = (10.2%/year total return) − (3%/year removed in gross dividends, which pay all fees).
• Result: $2 billion portfolio market value: ~7.2%/year average gain doubles the portfolio’s value.

WHAT TO DO:

• Sell Growth ETF with a triple on the $500 million investment; sale proceeds are $1.5 billion.
• Keep Income ETF’s ~12% current yield on original investment: 5.4% dividends grew 8.5%/year, now paid from the $2 billion portfolio. Bonds can’t do this.

No. None of those can provide the benefits of dual-purpose ETFs. We cannot imagine how a talented team at an insurance company could do this, or how these benefits can be provided without two independent ETFs investing in a single portfolio.

Three objectives for ETF issuers are:

• Expand opportunities for new revenue sources, free cash flow and profits.
• Do this without straining the issuer’s budget and portfolio managers’ time.
• Build the reputation for innovation with iconoclastic ETFs that bring the benefits of Wellington’s historic dual-purpose CEFs.