When you look at an ETF, it’s not good enough just to say what are the factors or what are the rules. You have to understand what they own inside of them. If they own massive, large-cap, liquid stocks, you’re not going to have the same problem as an exchange-traded fund that’s very thin. In other words, one that just owns one specific vertical. There are all kinds of eclectic ETFs being built these days around whiskey and marijuana and hacking and all that kind of stuff. The trouble with that is sometimes the stocks that are held in there are very illiquid. So if you want to buy a lot of it or sell a lot of it, it’s volatile, and I don’t do that myself. And I’m very, very concerned about what’ll happen because the fastest-growing asset class, as you just pointed out, are ETFs. But you have to understand what you own. I prefer large, liquid stocks. If I’m going to own Microsoft or Apple in an ETF and I want to put $100 million to work, it’s not a problem because I’m only buying 40,000 shares of a stock that trades hundreds of thousands of shares a week. So I’m okay with that. Q: The Kevin O’Leary brand is blowing up all over the media and in lots of different ways. What’s next? Besides the ETF business and Shark Tank, what do you have in the works? KEVIN O’LEARY: You know, I’m getting very involved in financial literacy. I like to talk to college students. In the last couple of months, I’ve been teaching at MIT, Notre Dame, Temple last week. I’m trying to get kids in their early 20s to understand what it means to be an investor
Q: There’s one risk with all index- based ETFs, and I wanted to get your opinion on it. The component that makes me a little worried is the volatility component... Over the past five years, I’ve seen a wall of money that has been shifted from either active management like a mutual fund or passive management like just the plain S&P. Do you have any concerns about the amount of capital that is chasing low-volatility stocks? KEVIN O’LEARY: Well, you make a good point and I agree with you. If you have a single factor like high yield or low volatility, that’s a problem. For example, take high yield. You could end up with a lot of broken stocks if their price has been cut in half and their dividend’s go from 3% to 6% or 7%. If all you cared about was high yield, you’d end up with a lot of bad stocks you wouldn’t want to own. I don’t like strategies that are single-factor because nobody buys a stock on a single factor like low volatility. I don’t agree with that, so in some ways, you’re absolutely right. What I prefer is to do what managers do. They look at a whole range of things that matter. For example, the rules I gave you are what is designed by an active manager, someone that I used to work with for years that cared about the quality of a balance sheet, so she didn’t like to see debt being used to raise dividends. She didn’t like volatility. She didn’t like companies where asset returns were slowing, return on assets diminishing every quarter. That’s multi-factor, or basically how an active manager works.
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