Interview: Michael Willis Of Index Funds, S&P 500 Equal Weight Fund Ticker 'INDEX'

Interviewer: Hey Mike, how's it going? Michael Willis: Good, Nick. Thanks for taking our call. We're excited. We saw that our press release was on your website and said, "Alright, they're already picking that up and doing an interview at the same time." We appreciate that. Interviewer: We're all over it. We don't stop, here. I guess the first thing I wanted to talk about was, first and foremost, tell me a little bit about the index. MW: Alright- Interviewer: Just an overview. I've done my research, but I want an overview for other people who aren't familiar with mutual funds and ETFs and how the market cap is composed. MW: The S & P 500 INDEX, of course, is the most widely benchmarked index on the planet. So, even though the DOW JONES is quoted on a daily basis, on the nightly news the S & P really is the one the managers track, and it's the most widely benchmarked, and it's of course the top 500 largest companies in America, but the scope is really global when you look at the companies - Google and Facebook and Apple, and the rest of them, they're all global in scope except for some of the ones at the back end of the 500. So, it's a market cap waiting of the S & P 500. That's what most people understand the index - actually, I don't think most people understand the index that way. But the widely held S & P 500 index is a market cap weighted. So, you have the top 50 largest companies actually comprising more than 50% of the index. I think that's key for what I'm about to tell you. So, what happens there is it's closer to an S & P 300 index, because the bottom 200 of those 500 companies barely show up percentage-wise in the portfolio. So, when we found the S & P 500 index equal ray, we got really excited, because not only was the performance better across the board since its inception, but it's the simple, logical, pure version of the S & P 500. I think, if you ask the average person on the street, it's probably what they thought they owned when they bought the S & P 500, because they got all 500 equally. So, it's the S & P 500, and Apple computer, Google, is not weighted any different than any of the other 498 companies, constituents in the index. Now, they choose those constituents based on their market cap, so the size does matter. You have to be the biggest 500 companies out there to make it into the model. And it's changing. It's a fluid model. We get updates daily from the S & P on the model. And it's amazing how many changes the make. They just don't make changes quarterly or semi-annual or annual, they're adding them all the time. Companies are dropping out, they're bringing companies in, there's merges and acquisitions, there's consolidations; and so, that index is really a fluid index. Interviewer: Going off that, do you re-balance quarterly, yearly... how many times do you re-balance for the index fund? MW: We balance - it is quarterly, and that is set by Standard & Poor's. So, we're now tracking an index. So our job is not to tinker with it. Our job is not to try to influence our own thought process into the model. Our thought process, our objective, has no tracking to the index. And yet, standard practice re-balanced that index quarterly, and all 500 components go back to the same weighting every quarter, and then they free-float in between those periods. As one of the 500 takes off and does quite well, and another does quite poorly, it's gonna obviously be a lower percentage during that interim period, and the one that's doing well will be a higher percentage, and then it re-calibrates three months later on re-balance day. Interviewer: Gotcha. Going off the re-balance, compare yourself to some competitors like Guggenheim, Invesco, I know they have similar equal-weighted products. Stack up yours to those competitors. MW: Okay, we're identical. There is no difference, other than our fee structure. With Invesco, I should say - because, Guggenheim is an ETF. The ticker symbol there is RSP. And Invesco is a 1940 traditional mutual fund which trades once a day. So, the basic difference between Guggenheim and Invesco and our model is that Invesco and I re-balance - excuse me, strike an NAV, a net asset value, once a day. So you can trade in and out of our funds once a day. Whereas Guggenheim allows you to trade in and out of it all day long. You can short an ETF. There's definite advantages in terms of liquidity with an ETF. However, I think if you saw on Black Monday, RSP fell 43% for about 30 minutes at the open there during a period where the underlying 500 constituents were only down 5 and 6%. So you've got a problem there. I mean, that's a major - there's some risk that comes with catering your fund to day-traders. So, the main difference between us and Guggenheim is they cater to day traders, so you can trade it all day long, you can short it. So you're susceptible to high-frequency traders, we call the HFTs. You're susceptible to shorting. And you're susceptible to market volatility. And so, I don't know how much you pulled up Guggenheim yet, but there's about 20 articles that really focused in on why they fell 43% on Black Monday three weeks ago when the rest of - we were only 1/10th of 1% deviation from our underlying constituents when we struck our NAV. We did not experience that volatility that Guggenheim did. As a result, how many million flowed out in the last five days, Todd? What was that number? Todd: 680 million in outflows a week or so ago is reported. MW: You can imagine - I mean, some of it, obviously, is markets, that people are scared of the markets. But if I'm sitting there and I'm a foundation - there was over $10 million in RSP on that day. It fell $4 billion there briefly. And it bounced right back, to be fair. But if I'm sitting there and I have $10 billion in the market, and all of the sudden I have 6, that's a problem, especially when the underlying were only down 5.6% at their worst point during that morning, when the market gapped down 1000 points. So, we're actually very happy to cater to investors who don't want to day-trade. And really, there's 15 trillion of them, because there's 15 million of assets in our space, and ETFs is the fastest-growing space. But there's still only $2 trillion over there for the people that want to day-trade and short their ETFs and do some of that other fancy stuff. Interviewer: It seems also like you're index also has better fees in terms of those competitors. I was looking that up. Like you said with the ETF, you're suspect to more market risk on a daily basis. It's a little bit scary for those of us who are not quite in the know on to the workings of day trading and the psychology of it. It seems like INDEX is meant for 1, 3, 5, 10 years down the road. Am I right? Is that the timeline you're looking at? MW: That's exactly right. And we love the 401K plan, IRA... there's a reason most 401K plans won't left in. They don't want their employees sitting there day-trading during the day their 401K plans. We cater to the longer-term hold investor. And frankly, what this came down to, Nick, is, we spent 20 years trying to beat the S & P 500 and we couldn't. So, we get excited about the fact - because, we think we're not alone. Look at Warren Buffet, two years ago, announces that when he dies, he's gonna tell his heirs just to put 90% in the lowest cost S & P 500 and 10% in cash, and that's all he's gonna tell them to do, because frankly, Buffet's been having difficulty beating the S & P 500, and I don't know how much you paid attention to the dialogue, but, every year during his annual report, we all watch it because he's arguably the best trader on the planet. And he's said in the past that if he can't beat the S & P, he needs to be fired. And so, every year, they show his trading 5 years against the S & P 500, and every year, he's had a better trailing 5 than the S & P up until 2014. We were all wondering what he was going to do, because in 2014, we really got soundly beat in 2013 in our portfolios, and so did Buffet. And it was such a trouncing that it ruined his 5 year trading fly number. He no longer beat the S & P. So we were all waiting to see what he was going to do. And he comes up and makes his announcement and doesn't say anything, but right there in the annual report, they still have the chart, they at least didn't pull it out, they were true to that extent. But what they did that was a little less than full disclosure, they showed a 6 year trailing number for the first time ever. And so, Buffet won on a 6 year trailing number. And then, I think the attorney made Buffet not bring it up, because then, it was like one week later that he came out and made the announcement about 90% in the cheapest S & P 500 fund you can find. So, I think a lot of money managers out there like me, like Buffet, are just finding it hard to beat the S & P. And so, we got an opportunity to use our ticker symbol, INDEX, to pick the best index on the planet. The S & P 500 was it. But really, a lot of the equal weight, I've always been an equal weight type of a guy anyways, and a lot of my strategies have had equal weight philosophies in them, going back for 20 years. I was already equal weight friendly. So when I found out that the equal weight had better performance and it was easy to explain, it was simple and logical, then that was just - you can imagine my excitement. But you're exactly right. We're 25% cheaper in fees than RSP, and a little more than that in the Invesco. And that's where - I mean, we're the new kids on the block, so obviously, we can't charge more than anybody else. Our goal, though, is to be the low-cost provider. So we're sticking our neck out here and saying we think we found the best-kept secret on Wall Street in terms of indexes. And we've got an easy ticker for everybody to remember. We're gonna be the low-cost provider, and we think that's our winning ticket. Interviewer: How did you guys luck into having INDEX as your ticker? I'm sure Todd's happy. It's really identifiable. It seems like it'd be an easy thing to sell, right? MW: You know, to be honest with you, I think that's a $20 million gift right there. That's a gift from God. I'm not gonna take any credit for that. But in my mind, from a marketing standpoint, it's worth - to the right company, and hopefully that's us - it's worth $20 million. In all fairness, the - I mean, I love John Bogle. I think he was right from the beginning. They laughed at him when he first rolled out the S & P 500 index. And they said, "Why would we want to ever own something that only got market returns? We're managers, we're paid to beat the market," and it just didn't make sense to them. And now, look. Over $1 trillion, the largest mutual fund company in the world, and John Bogle was proven right. I would think he would love that ticker, but they prefer all their tickers to start with VF for Vanguard Funds. We're just happy we were able to land it, and excited that we can move it forward and hopefully make it easy for people to tell other people, "Hey, if you're tired of beating the market..." And really, we could only beat the S & P with the S & P. And that's the fun part of this. We didn't have to go outside of the S & P 500 to beat it. Did Todd send you the chart that shows the two compared together since inception? Interviewer: Yeah, I was actually looking at your website, and it was definitely noticeable returns. It was definitely pretty impressive performance, if you backtrack. It was very notable. MW: Well, we only did it since inception, so none of those numbers are back-modeled. In fact, the reason it starts there in 2013 is because we would have liked to have taken it back further, but our compliance wouldn't let us. The S & P 500 equal weight incepted on January 8, 2003. So, since its inception, which is the only thing our compliance will let us show, those are your numbers there. So, those are actually real numbers. RSP, Guggenheim's equal weight launched back then. So, those are pure numbers, and we think they're exciting numbers. Interviewer: Yeah, it definitely is. And going off your respect for Vanguard - there was a notable financial blogger, Michael Batnick, I'm not sure how much you know about him. He brought up the fact that while he does like your INDEX product, he brought up the fact that you could possibly get pretty similar returns with the S & P mid cap 400 that Vanguard has indexed as a fund based off of that index, and it has pretty similar correlation, except the BPS - they charge 15 basis points less than your current fund. How would you counter this claim? What would you retort with his findings? MW: What you miss there though is the top 100. As much as we say we want the equal weight throughout the portfolio, we would hate to give up Apple and Google and Facebook. To get that 400, you're gonna be giving up a lot of most of the well-known names of the S & P 500. And that's a space we don't want to pull ourselves out of. Keep in mind - if you had $100,000 and you wanted to invest it, and you went to Schwab and tried to buy the S & P 500 companies equally, it'd be 500 positions and $999 in trade. So it's going to cost you $5000 for a 5% trade. And let's say you want to sell it a year later - that's another $5000. That's a 10% hit just to go in and out at one of the cheapest broker dealers in the country, at $999 a trade. So, what we're doing, we're bringing in a strategy we believe is exceptional to investors at the lowest cost they can find it on Wall Street. And it includes those top 100, which we don't wanna x out just to save on fees. Interviewer: Gotcha. That definitely makes sense. That being said, the INDEX fund, how much are you looking to have assets under management? What's your goal? Obviously, it's to beat the S & P 500. But are there any other ancillary goals to go with this? MW: Yeah. We think there's about $15 billion in the equal weight space right this minute, between RSP and Invesco. But, depending on the numbers you look at, there's anywhere between - there's upwards of about 100 in the S & P 500 market cap portfolios that are out there. So, our real competitor is SPY, which is the S & P 500, the largest ETF in the the world, and some of these other S & P 500 index funds that are in our space. If you have $500 billion over there, and upwards of a trillion when you look at separate account managers, it goes a lot higher than a trillion dollars. We think they're gonna start to see that the equal weight really smooths out some of the returns and the performance, and justifies a second look by those spaces. And if we even had 5 to 10% of that space, take a second to look at the S & P 500 choices between the equal weight and the market cap weight, we think we can have - we love Guggenheim, we love Invesco, we think there's plenty of room for all of us. We see a day where we're all gonna have around $10 billion and up. And that's not even a lot. If we each had $10 billion, that would be $30 billion, and that's not even close to what the S & P 500 market cap weight market is. But, to answer your question specifically - we need a billion dollars in the next 18 months to show the world that we have something competitive and that we have something exciting, and we think we can hit that number. Interviewer: Awesome. Hey, I think you guys can definitely hit that as well. Going off of that, I know you love these index funds, these ETFs and whatnot. Are there any specific sectors you like, coming to the year end? Is there anything that you're seeing, utilities maybe, being a little bit defensive with the market right now? Are you a bio-tech guy? Is there anything that you like right now, in terms of sectors coming to you? MW: Look, I think the better play is this - think about it. The market's just pulled back. If I showed you a better index than the one you already own, why not harvest tax losses here? The market's been really volatile. The deck is being re-shuffled, so to speak. We just had nearly a billion dollars in assets come out of RSP. And if you look at SPY, it's a whole lot more than that. So a lot of people have gone to cash here. They've been spooked about the September-October part of the year. We're hoping that when they re-look at their portfolios and come back into this, that we're gonna be in the mix. You can harvest those tax losses, come out of the indexes that you're in and come into our index on the way up. We think that's the better play, because the Santa Claus rally is typically something we see. So, even though the next month or so might be really challenging on the market, those investors that go to cash, we think they'd have a good position to come back in and we want to be in on it. As far as specific sectors, we don't do that anymore. That was, my prior life was, trying to beat the S & P. And what I found was I had years where I beat it and I had years that I didn't. Over the course of 20 years, what I realized is it was a waste of time to try to beat the S & P 500 index. Very few managers do it. 86% don't, according to a Standard & Poor's report. But on a wider level, if you look at the S & P 500 equal weight, I don't know what those numbers would look like, but I'd love to see, if it's 86% don't beat the S & P 500 market cap, I'm just guessing, but I'm guessing it's above 90% don't beat the S & P 500 equal weight returns. If that's the case, why kill yourself and risk your hard-earned savings and time to try to get into that 10% category when you have a 90% option that's sitting right there. Interviewer: The numbers make sense to me. I would be remiss if I didn't ask, for the day-traders that go on Benzinga, is there any individual names you like? I know you mentioned some of the big large caps in the S & P 500, you mentioned you like some of those names. Is there anything you see specifically with companies? Maybe a little Twitter, maybe a little Facebook...possibly some company that's pulled back a little like Twitter, is there anything that you see like that right now? MW: There's one in particular, ticker symbol INDEX, that looks really good right now. Interviewer: I had to give it a try. I had to try to get a little something on the day-trader side. But hey, I love the index, it seems like it'd be a great product. Who knows, maybe I'll be a potential customer soon. But hey, I really appreciate you taking some time out of your day and talking this over with me. As a Millennial myself, I know there's people like me that want to know a way to invest in long term. So, really great stuff. MW: What it could be, the core portfolio holding for the person who wants, let's say, just a core holding, let's say 50% of their portfolio. And then they can use the other 50% to have some fun, so to speak, if they really want to try to beat the market. Buy a Chipotle. Chipotle has a great restaurant model, high margins, they're hard to beat right now. There's a reason McDonald's went out there and tried to buy them. They can look for those gems and try to find them, but we really believe the core portfolio should be built around some of those higher-percentage return plays like the S & P 500 index. That's what we would recommend. Beyond that, if they wanted to try to beat the market with a certain percentage of their portfolio, at least they're not risking their entire NASDAQ. Interviewer: I actually just talked myself into a question - if you were my age, I'm 24, if you're a Millennial, are you investing in the index? What's the advantage for me? MW: Here's what I would say. I can save you 20 years of my pain. I went through what you're talking about. I day-traded through college and my grad school, when I was getting my MBA. I bought a, it was cutting edge at the time, a satellite system, real time data feed, I studied volume, all the underlying companies that I purchased, I watched flows, I literally was watching trading tick by tick, and had some amazing months. I think the best month I ever had, I was up 4500%. But those returns aren't sustainable. So when you read these emails that come across, and they go, "Hey, earn 500%!" Or, "Earn 50%!" Over time, Nick, you are better off using compounding of interest over time in your favor. You can just see what happens is, you're gonna have some great returns, but then you're gonna have a year that you get cut in half or something, you just get wiped out. And the compounding of interest over time won't work to your favor. Where, if you're 24, you've got a good 30, 40 years of compounding that you can start to work right this minute just by dropping a couple thousand dollars a year into saving - I would just say, if you can save 10-20% a month, you're gonna be so far ahead of anybody. And then, if you can limit your speculation to maybe 10% of your portfolio, to try to find that next Apple or next Google. But limit it to 10% of your portfolio so that if you lose that part of the portfolio, it's not gonna materially affect your NASDAQ. That would be my biggest recommendation, is to say, consistently use the time value of your money to your advantage. You're young. And, start saving now, and you're gonna see that. The first 7 years are like staring at a boiling pot. You feel like it's not getting anywhere. But after year 7, the numbers really start to compound, and you're gonna look - you'll look a lot better than your peers if you can start right now at 24. That's a great age. Interviewer: Thanks, Michael. Hey, I'm going to take that investment advice to use! MW: Thank you Nick, really appreciate your time.