Tidal CEO Speaks on White-Label Platforms & Innovation in ETFs

Guillermo Trias, CEO of Tidal Financial, radiates energy and a seemingly ridiculous level of enthusiasm for everything he does — especially regarding ETFs. It might even be fair to label him the Energizer Bunny of the ETF world. Tidal is not an ETF issuer itself, but instead operates in the ETF ecosystem supporting issuers. It operates in spaces that investors may not be familiar with but that are essential for ETFs to function. Tidal is smack dab in the middle of these services with over 60 issuers as clients, representing almost two hundred ETFs and more than $20 billion in AUM. Because of that, Guillermo is well positioned to talk about the biggest trend in the ETF world.Hyland: Guillermo, you’re from Madrid. How did you end up in the crazy world of U.S. ETFs? Trias: I was always interested in innovation and entrepreneurship. And the best place to be if you want to be an entrepreneur is the U.S. I went to Kellogg in Chicago for my MBA. Later, I became very interested in battery storage technology, especially lithium. While researching ways to invest in the space I was connected, through friends, with a start up ETF issuer in the U.S. named Global X. With them, we launched the first lithium ETF, the Global X Lithium & Battery Tech ETF LIT. And that started my journey into ETFs. Hyland: Tidal is generally thought of as a ‘white label’ firm. That is a firm that provides new potential ETF issuers with the legal trust and Board of Directors so they can more quickly and cheaply start launching their own funds. There are a dozen or so firms that also provide that service. How is Tidal different? Trias: Aside from the trust aspect, there is a whole range of other services a new or existing issuer needs, and they can either hire somebody or do it themselves. Things like handling day-to-day trading of the ETF’s portfolio, regulatory compliance, fiduciary oversight through independent trustees, fund operations, marketing and market research, sales and distribution. For each of these areas there are a number of different firms you can contract with. But Tidal is really the only firm that offers to handle any or all of these areas. We are not a custodian or a market maker and we do not compete with issuers by being an issuer ourselves, but we do most everything else. We think we are very good at all of these things. But what we aim to be is the best overall partner to a new issuer and not just the best service provider in a particular area. We think that hiring service providers is more like getting married to someone. Marry the person you want to solve problems with. We want to be committed to working with new issuers for the entire ETF journey. Hyland: Why do you think more of your white label competitors don’t offer a bigger range of services? Trias: Well, we are in the headache business. Our job is to solve client’s headaches and help them succeed. Every different service you offer deals with different headaches. A lot of firms don’t want to try and solve all of the problems. Hyland: Let’s talk about trends for Tidal and the general direction of the ETF world. Trias: The ETF universe is getting crowded. As a result, if our clients want to succeed, they need to plan to offer investment products that will stand out, and offer investors something they want. That means for Tidal we are passing on more new potential clients than we accept. This is a function of how crowded the market has become and that many firms just may not have an investment product that is likely to succeed. Obviously, it is harder to come up with a design people have not seen yet. But product design is really only one part of the new equation going forward. And a lot of people do not think about the other factor that is really driving a transformation here. Hyland: What is the other factor here? Trias: I think there is a huge ongoing change in investors’ mindset, particularly at the retail level. They are becoming more institutional in their thinking and that impacts the products they want. This is a huge transformation. You are also seeing a transfer of wealth from Baby Boomers to younger generations. Some younger investors are acting on the basis of FIRE [Financial Independence Retire Early]. Younger investors are also willing to use new tools, like apps, that would not have been used before. Add it up, and investors are going to be interested in more than just traditional straight beta from index products. All of this is driving a huge amount of innovation in the ETF space with products that combine options and futures to produce defined income or outcomes, cryptocurrency, active management, and innovative fixed income offerings Hyland: What new things look especially interesting going forward from your vantage point? Trias: We see lots of opportunities in options-based and futures-based ETFs that augment the return streams of indexes or single stocks. Leverage – take the Defiance single-stock leveraged ETFs as an example – and income – like the YieldMax ETFs – were just the first iterations. We just saw the first-ever money market ETF launch. It will compete for the $6.5 trillion in money market mutual funds. We also see more innovation in tax optimization strategies that go beyond the 351 exchanges. [Note: A 351 exchange allows a large investor who has a concentrated stock position with a large built-in capital gain to swap it for exposure in a more diversified ETF without triggering the capital gain tax.] Hyland: Do you worry that innovation is running out of new things to produce? Trias: You have innovation from the product side but also innovation being driven by this new investor mindset. Investors want investment products that may be different from what currently exists. And ultimately these new ideas will be validated – or not – by investors. A mutual friend of ours in the ETF world, Meb Faber from Cambria, in response to someone pointing out that there are more ETFs in the U.S. than listed stocks, said that there is a very small number of letters in the alphabet but they can be used to make a lot of words. I would go a step further and say you can make not only more words but in fact full sentences. Running out of innovation? No – ideas are continuing to flow. 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