USAA, the financial services group that serves current and former members of the military and their families, is the latest large insurance/mutual fund company to enter the ETF pool. The company’s most recent filing suggests USAA will be modeling its exchange-traded funds after Vanguard’s approach to creating ETF shares out of its existing mutual funds. ETF.com sat down with Matt Freund, chief investment officer of USAA mutual funds, and Paul Fulmer, AVP investment product management, to discuss USAA’s ETF plans as well as its fixed-income investing philosophy. Freund will be a speaker at ETF.com’s Fixed Income conference Nov.4-5 in Newport Beach, California. ETF.com: What’s the investment philosophy or approach that makes USAA unique? Matt Freund: One of the things that attracted me here was the philosophy that the investment team had the time—and still has to this day—of really focusing on the fundamentals. Sometimes we like to talk about these things as being old-fashioned. I would call them classic principles of investment management that are so timeless because they work over long periods of time. We take a long-term view. We focus on fundamentals and valuation. We’re willing to be different from the crowd, to look different, even if it makes us look foolish in the short term. ETF.com: Are your mutual funds all active or are some of them index-based? Paul Fulmer: We’re primarily active. We do run a couple of index funds as well. But I'd say our primary focus has been in the active space. ETF.com: From your filings, it seems you’re going to be modeling your ETFs after Vanguard’s patented approach to creating ETF share classes out of existing mutual funds. Fulmer: We actually amended our exemptive relief letter a few months ago; in particular, to at least contemplate the potential to launch the funds as a share class or funds a la Vanguard. We’ve been in discussions with Vanguard in regard to licensing its patent for that structure. ETF.com: In your original filings, you list 14 of your current mutual funds that I assume would be the first ETF approaches. Fulmer: We envision we’ll take many of our strategies that we're currently running in mutual fund structure and move them forward into the ETF space. That's not to say we won't look outside and create other strategies down the road that would come in an ETF form. But at least our initial focus will be strategies that we currently have employed in our mutual fund structure. ETF.com: Will the ETFs be cheaper than the mutual funds, as they are with Vanguard, generally speaking? Fulmer: Yes. We haven't fully decided on the exact pricing, but our general thought is that our ETFs will be at or below our institutional share class pricing on the mutual fund side. Freund: One of the things we strive for is to make sure we can deliver above-average service, above-average performance, for a below-average price. You’ll see that consistently across the platform, whether it’s the bond funds, the muni funds, the equity funds. So the analogy to the Vanguard model is not quite exact, because we’re owned by a company that's owned by the shareholders. But the philosophy is right on. ETF.com: Let’s delve into your firm’s fixed-income approach. Freund: We have a long legacy on the fixed-income side. We started as an insurance company, and insurance companies have a tradition of funding their liabilities with fixed-income investments. That's our legacy, and it goes back to the first days of USAA as an enterprise. That legacy has grown. We got into the mutual fund business in the early 1970s. But again, the longest and the most established teams we have here are on the fixed- income side. We've been doing it for a long time. We've actually won the Lipper Award for the best large mutual fund shop twice in the last 10 years. We have a deep fixed-income team with traders, analysts and portfolio managers. And we have a long legacy of outperformance in that space. Fulmer: From the ETF perspective, both because of our long-term strength and track record in the fixed-income area, we are contemplating going on to an active fixed-income ETF offering. We feel that fixed income is a good opportunity in the active ETF environment. The other thing is, on our equity side, we want a mixed shop of both internally managed funds and strategies as well as a heavy use of subadvisors. So that's why we're kind of focusing on the fixed-income launches initially out of the gate.
today , financial services firm to members of the US ##F , is the latest large insurance / mutual entrant in the insurance market . The predominantly active asset manager plans to create ETF shares from its existing mutual funds , similar to the model used by Vanguard , and is in discussions with the ETF giant over plans to renew its patent for the structure . With its roots in the insurance market , that firm has a long legacy and strong track record in fixed income and is considering launching an active fixed - income fund as its first public offering , a relatively new and growing area in the ETF market .