Sean O'Hara launched Pacer ETFs in 2015 as president. But years of running the distribution channel for Hartford Financial started him down the path of looking for the best ETFs.
O'Hara and his partners at the time looked to expand the Hartford business. But launching their own products and using their expertise to sell them was easier, they found. After years of performing sales, marketing and distribution services for partners, including MassMutual and Royal Bank of Scotland, Pacer Financial debuted its first ETF.
Starting from scratch in the ETF business, O'Hara and Pacer found they needed to differentiate themselves from the industry's giants, including Vanguard (which happens to be just a couple miles down the road from its headquarters in Malvern, Pa.) That meant a focus on innovation, disruption and uniqueness. The guiding vision O'Hara takes when developing new products is: "Can we solve a problem, is it viable and worthwhile, and can it benefit an advisor?"
Launching A Best ETFs Fund Family
After its first ETF launched, Pacer debuted the Trendpilot series of funds. These funds uniquely rotated risk strategies based on short- and long-term market trends. They moved between stocks and Treasury bills to manage overall risk. While those funds have been successful, both in terms of performance and assets, the fund that launched Pacer into the ETF mainstream would debut about a year later. That ETF was Pacer U.S. Cash Cows 100 ETF.
Most investors suffered in 2022's market. But Pacer's ETF looked great in contrast. The fund's free-cash-flow yield strategy finally came back into favor. And the fund outperformed the S&P 500 by more than 18% during the calendar year.
COWZ proved to be a successful concept by accumulating $1.2 billion. Assets under management ballooned to more than $10 billion by the end of 2022. Today, COWZ is a $23 billion fund. And Pacer is a top 20 ETF issuer by assets under management.
Investors Business Daily spoke with O'Hara about his company's recipe for success as well as what he thinks the markets may hold for the future.
Going For Cash Flow With The Best ETFs
IBD: Why do you think a cash-flow-oriented value strategy like COWZ broke through in a market dominated by tech stocks?
Sean O'Hara: The success of our cash-flow-oriented value strategy is supported by two factors. The first is that value must always be part of portfolios. It is irrelevant how well tech names are doing or if growth is doing better than value. You're always going to want some part of your portfolio attributed to a value approach. Secondly, our free-cash-flow yield approach has redefined value.
Traditionally, value has been low-price-to-book stock investing. Today's stock market's value is predominantly attributed to intangible assets. That means that traditional low-price-to-book investing leads you to be consistently overweight sectors like utilities, financials and real estate. We simply replaced low price to book for free-cash-flow yield to generate value in a portfolio. By using a free-cash-flow yield in a portfolio, you're potentially getting better earnings growth, higher current cash return, and the portfolio trades at a discount relative to the P/E benchmark.
IBD: What's a brief rundown of the Pacer ETF lineup and what it offers to investors?
O'Hara: Pacer offers a portfolio of ETFs that includes value and free-cash-flow yield strategies in our Cash Cows family, growth strategies, thematic plays like our Pacer Data & Digital Revolution ETF (which invests in the AI boom), risk mitigation strategies via our Trendpilot or buffer funds, and unique income-generation strategies.
What's Next For Best ETFs?
IBD: Where do you envision the next big growth frontier is for your company?
O'Hara: We think we are as right about redefining growth as we were about redefining value.
On the growth side, free cash flow margin is a potentially better way to get growth in your portfolio. Free-cash-flow margin, measured by a company's total free cash flow relative to its sales, serves as a metric to identify top growth names with higher profitability and long-term capital appreciation. You need sales growth that generates profit over time. With a portfolio that leverages free-cash-flow margins, you can get stronger sales growth, better earnings growth, and will trade at a multiple equivalent to the broad markets' multiple rather than the growth multiple.
IBD: How does Pacer Metaurus U.S. Large Cap Dividend Multiplier 400 ETF differ from a traditional covered-call ETF?
O'Hara: We see QDPL as a great complement to traditional covered-call strategies. The equity upside with QDPL is not as constrained as traditional covered-call strategies where you are usually capping your upside. QDPL seeks to generate as much income as covered-call strategies by using dividend futures, but that income is much more tax advantaged so the net yields are higher. On the flip side, covered calls might work better in a down market, so incorporating both into your portfolio works to protect you in any market scenario.
Too Much Of A Good Thing?
IBD: Do you worry that investors have become too concentrated in their portfolios to just a handful of tech stocks?
O'Hara: Yes. We're going through a period like that right now, which is not unique, where you get a highly concentrated stock market. What worries me is two things: One, highly concentrated markets never last. It makes sense for investors to consider what happens after one of these periods ends. It won't necessarily be traditional cap weighting. Second, what we're seeing in markets right now counters traditional index-based investing. The goal of buying a whole index is to give you a diversified portfolio. However, when you have 30% of the weight and 100% of the return of a portfolio being generated by seven stocks, there's no real diversification.
IBD: What do you think central bank monetary policy will look like over the next 12 months?
O'Hara: My expectation for central bank monetary policy is that their actions will be far less aggressive than what most people think. We came into 2024 believing the Fed would cut rates four to six times. Now, we may get one cut this year. If you look at the dot plot, we're not going to go back to a 0%-interest-rate environment. Interest rates will likely remain higher for longer, which is a challenge to the overall market because those interest rates have an impact on future earnings.
Unexpected Risks For Best ETFs
IBD: What is the most underappreciated risk you see in the financial markets today?
O'Hara: There are two risks I see. The first is concentration risk in equities markets. These highly concentrated names are not like the old tech bubble names. They generate a lot of revenue and profits but they're also so big right now because they're pricing in a lot of their future earnings. Once some of that risk comes to light, there's a significant chance the markets come back to reality a bit. The second risk is on the fixed-income side, where the risk of credit spreads is underappreciated. Similar to equities, markets are not pricing in any risk because credit spreads are so narrow.
Sizing Up The Economy
IBD: Any other final thoughts on the state of the global economy and financial markets?
O'Hara: The future we all hope for based on the current AI revolution is very much like the future that was produced by the tech bubble and the internet. The internet and tech bubble created significant productivity gains, and there is a good chance that we'll see comparable productivity gains as AI becomes fully realized. This productivity not only is generated by chipmakers but also by the companies that incorporate AI in their practice. It's a tailwind for the markets many people might not be appreciating.
