Market Extra: Invesco’s new head of ETFs is taking his cues from Uber and telemedicine

In a conversation with MarketWatch, Hoffman reflected on lessons he’s taking from fintech, music, and more — as well as a few observations on end investor behavior, like how some Invesco clients may be starting to recognize certain stocks are too concentrated in their portfolios.

The interview below has been edited for clarity.

MarketWatch: You started your career at PowerShares, working with Bruce Bond and John Southard?

John Hoffman: I started my career with PowerShares. We had about $3 billion at the time. I spent a lot of time with Bruce and John, they’re still dear friends of mine and they are still having great success. I joined in 2006 (after a career transition) and over that time period have I’ve built and managed several areas of the ETF business, including leading efforts in the RIA group, private client, and retail and institutional channels. The industry is now nearing $5 trillion in assets, so I’ve really had a front row seat to the growth in the ETF space and have been fortunate to work with some of its leaders. It’s certainly been fun.

MarketWatch: What are your big goals now?

Hoffman: First of all, from a visionary perspective, the innovative spirit that this business has possessed since the beginning, that’s certainly going to be core to our future vision. The long-term vision at Invesco is about being the most client-centric firm in the industry. A lot of the innovation has been on the product side. For example, we launched the first active ETF and the first senior loan ETF, and we pioneered smart beta. Now we’re looking to extend that beyond product. Now it’s about harnessing that innovation ethos and extending it into the client experience. Most critical to all of this is the culture and the people and at a basic level that’s all this industry is. A core focus will be building and perpetuating teams – attracting and retaining the top talent in the industry. And also, peeking outside this industry and looking at what’s happening in parallel in other industries. There’s a lot we can adopt.

MarketWatch: Can you talk more about that? I assume you’re thinking of things like fintech, how consumers interact with products?

Hoffman: Yes, exactly. How we interact with products, as consumers. We consume financial products in our normal lives. So we’ve done a fair amount of research in parallel industries. One element we’re looking at in particular is the concept of network effects that you see in technology. I would draw a parallel to Uber UBER, +2.77% and other things we use every day. When there’s one car it’s not very valuable, but you get more cars on the network and the network becomes more valuable. We’re seeing something similar in ETFs. I always remind people that ETFs are a technological innovation that deliver financial returns. We’ve mapped out ten network effects that occur that ultimately will power this industry to $10 trillion. The network effects are in motion. We’re also looking at things like teledoc/telemedicine, how we interact today with doctors, and how that could start to transform the way we work with financial advisors.

I often look at the music industry. You think about the evolution from records to tapes to CDs to digital and how that industry changed and the benefits that accrued to the consumer. We have access to virtually every song ever written right at our fingertips.  You hear this talk about asset management and you think about the music parallel.

Read next: This innovation could do for investing what Napster and the iPod did for music — and financial services may never be the same

MarketWatch: Who are your clients, John? Who do you think about, whether in the big picture that you just ran through, or the details? Who are you working for?

Hoffman: At the end of the day, if we map to the vision of the firm, we have to start with the end investor and work our way backward from there. You look at the complexity of the industry and the challenges of the industry. When you think about beautiful design, the Google GOOG, -0.73% GOOGL, -0.67% interface, an Apple AAPL, -1.31% iPhone- my two-year-old daughter can unlock it and use it. That shows you the simplicity and the beauty of the design. The ETF in a lot of ways is in that same construct. Simple, transparent, easy, convenient. But you should not confuse simplicity and complexity. I would never think of an iPhone as a simple instrument. It’s complex. But the delivery is simple and intuitive. So we map backward from the people saving for college, saving for retirement, people who have real life goals. We want to make this as simple as possible for them. Financial education is a core thing we’re thinking more and more about. Ultimately, my teams are waking up every day and thinking about the end client.

MarketWatch: What’s the most interesting type of ETF, whether that’s an investing strategy, an asset class, or something else?

Hoffman: The transformation that is occurring in fixed-income ETFs is tremendous and transformative. This is not a new concept. The first fixed-income ETF launched 20 years ago. But one of the things I’ve thought a lot about is how long it takes for innovation in financial products to be adopted. Part of it is the tangibility issue. When you think about an iPhone, you can see how it works and what it looks like. When you talk about a new investing theory, it has to prove out over time. Fixed-income ETFs are a truly transformative technology that is changing the way money is allocated and capital is created. We’re just moving toward one trillion in the U.S. It’s gone through many market cycles and tests, and it’s truly transforming the markets. What most people miss on this is that it’s a technological innovation, it has driven the electronification of fixed income markets. That is what is so significantly transformational: being able to see and trade and buy and sell real-time, fixed-income on an exchange is truly transformative, versus picking up a phone and calling people dealers and getting prices…I think we’re in the early innings of the growth there.

MarketWatch: What are the strategies Invesco offers that you are going to prioritize, or are you going to have a broad scope?

Hoffman: Here in the U.S., we have 220 listings, we’re the fourth largest issuer in the states, and have really been focused historically on the value added space, the smart beta space. That’s where we drove education and broke new ground. We have the track record, the history, the scale, and you can see the live performance of these. We really pioneered many new markets, like the first smart beta fixed-income ETF. Many were firsts for the industry. When I think about the path forward, I think there’s things around technological innovation, this movement from active to passive will persist, this migration from brokerage to advisory, we think that’s going to extend. The self-directed space that’s driving changes like fractional shares. ESG. In a lot of ways, by not being in the commoditized space, we have a large shelf of products that are early in their lifecycle, so we have a lot to do with the existing product lineup.

MarketWatch: RSP, Invesco’s S&P 500 Equal Weight ETF, RSP, +0.52% has historically been a strong performer vs. SPY SPY, +0.05% (the biggest S&P 500 ETF, which has an equal-weighted approach) but has lagged behind in the last couple of years. Are investors going to continue to gravitate toward the big winners or look for some diversification?

Hoffman: That’s a great question. One of the core elements we think about is being in the market and staying investing and there’s an emotional component that goes along with that. Part of extending the client component is education about the benefits of staying the course and staying invested. RSP has underperformed the cap-weighed approach recently, but over an extended period it’s done what it was meant to do. Had you invested in the equal weight or the cap weighted, the equal weighted was better. What alarms me is the $700 billion that’s gone into cap weighted S&P 500 exposure over the last 12 years or so with the concentration risk that that introduces. Nearly 24% of the fund is based on the top ten holdings. We’re at a point now where that cap weighted strategy has significant exposure to a small number of stocks. But we all understand diversification. We see clients now starting to rotate to RPS. They understand the benefits of the diversification that RSP provides. that’s been a trend that has intensified since the (coronavirus) crisis.

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