Sean O'Hara, Pacer QDPL

And then in 2007, I just decided I needed to do something else. And the founder of Planco, who was one of the sellers, he and I had been friends for a long, long time. And I said, I can't, I can't keep doing what I'm doing. I'm going to do something else. So we decided we would, initially, we were going to just be a distributor for somebody else. And so we had a couple of what you would say would be rocky relationships along the way. And out of that, came our ETF business. And so in 2015, we launched our ETFs. We started with three basic risk management strategies. Those are called trend pilots that used a 200-day simple moving average as a, trigger.

You either own the S&P or you own T-Bills, as an example. You own the Nasdaq 100. And we just built from there. we built a value suite. We built a growth suite. We launched a couple of fixed income products. And so we've grown over the years. So we started, as I said, in 2015 with zero assets. And today we're like $42 billion, somewhere around there. 55 different products or 57 different products, a few things in the pipeline that we think are interesting. We like to build ETFs that are what we call either innovative, disruptive, or unique. In other words, the ETF landscape is really dominated by, the big three. And most of what they do is sort of cheap beta, right? Just

Wrap the S&P 500 or wrap the Nasdaq. And so there's not really much for us to do there because of the size and scale of those ETFs and because of the fee structure. So what we do, everything we do has an outcome in mind. It might be higher returns. It might be an innovative approach to, putting out an income-based product. It might be risk management. It might be something that nobody ever thought of before. And so that's sort of how we built our business and built our brand.

Provide some diversification against that position or provide some excess return or provide some, some risk management to the downside. So that's really sort of where we, we love to sort of sit. So the product we're going to talk today about is QDPL and it's based on the S&P 500, right? So lots of people own IVV or SPY or BOO. And if they own that in their portfolio, that's wonderful. it's always nice to have a good broad market index ETF in your portfolio, especially since, you can get the indexes returned for a very small price, but there are, there are, there are nuances around that, that we think we can fill in for clients. And so that's really what we

You have to be in the S&P 500 and have to have been paying and growing a dividend for 25 plus years. That sounds great. But what we find with dividend strategies, if you want to buy stocks that have high dividends, they're generally not in sectors of the economy that have great growth prospects. Hence why utilities pay big yields and why financials pay bigger yields than, the average stock in the market or real estate. So you're making this trade-off and you're trading away future growth in order to get a higher cashflow today. Another way folks do this in the market is with covered call strategies. So like JEPI is a big giant covered call ETF, very, very nice yield, right? But very constrained on the upside. Well, when you are pursuing income, you don't just

Want the income today, but you want the income to grow ahead of the cost of inflation. So you have to grow your principal value as well. And that's where we think the traditional ETF that's focused on generating yield or cashflow for the investor or income for the investor falls short. With QDPL, 85% of the client's money is in the S&P 500. So that will be the engine for growth. The other 15% is invested in treasury bills. So we get a little yield there, but we use those treasury bills as collateral against dividend futures. So there's a big burly market, if you will, in dividend futures. You can actually just buy the dividends of the S&P 500 if you wanted to. And by combining that 15%

In T-bills and 85% in stocks, we can design the ETF, QDPL, to produce a yield that's equivalent to four times the current S&P 500 yield. So if today the yield was one and a quarter, we would be getting a 5% cashflow on an ETF that's 85% invested in the S&P 500. So if you were to compare that, let's say, to a dividend strategy or to a covered call strategy, you would see that your principal would grow faster in QDPL, which means now you're getting income on a bigger and bigger pile of money. So that's the essential problem that we're trying to solve with QDPL, is how can we get more income or cashflow to the end investor who is now starting to think about where do I want to put my money so

That I can use it to live all for the rest of my life? So walk me through then how the strategy

It's done exactly what it's supposed to do. And so there's no lack of transparency. You know what you're getting. And then one of the other things about it that's really nice is that the bulk of the distributions that we make are going to be tax-free. They're going to be considered return of capital. And there's this little quirk, if you will, in the way that mechanics work. So when I own a stock that pays a dividend, they pay the dividend and then the stock price gets reduced by the dividend they pay. So they're giving my money back to me, right, in the form of a dividend. And then you have to pay tax on it. Well, the way that our interaction with those dividend futures work is we're giving the money back to the client,

But we're considering it principal. So that part of the distribution is not taxable. So in any case, when you buy something that's got a dividend attached to it, when it's paid out, they're just giving your money back. It's just a matter of, do you want to pay tax on it like ordinary dividends or would you rather just consider return of capital? That's extremely interesting. So I would,

That. But they came to us and said, what do you guys think? And their original concept was let the investor or the advisor figure out how much of the price return they want and how much of the dividend, blah, blah, blah. And what's better than seven-minute abs? Well, six-minute abs are better than seven-minute abs. So we said, why are you making people do all the work? Why don't you just package it? So we actually launched two versions to start with. We launched a four times and a three times. The four time is the one where all the money went, no surprise, but we just didn't know what was going to work. And that ticker is QDPL. The three times was TRPL, triple, but nobody bought that. So that ETF went away. And then we sort of are now moving down

The road with other ways to apply this. So we launched a version for the Nasdaq. That ticker, the Nasdaq product is essentially Q6. So the six in the Q6 tickers, we're getting six times the dividend in terms of yield or distribution from the Nasdaq. So the Nasdaq's dividend right now is about 0.8%. So you're getting almost a 5% cashflow off of your Q6 portfolio. And again, 90% plus tax-free. I think that, the QDPL has done phenomenally well and it's grown to be a really, it's a billion, 4, billion, 5. So it's a solid ETF and it will continue to grow.

Dividends on the S&P 500 historically grow between five and 7% per year, right? So you take the whole basket of those 500 stocks over time, that basket of 500 names will increase their dividends approximately five to 7% a year. So one of the other sort of keys to the total return here is that when we enter into those dividend futures contracts, we're paying a discount to what the dividend payments were the previous year. So if they do increase five to 7%, then we're getting a little extra return. We're getting more back for that dividend future than we started with. For Q6 with the Nasdaq, the Nasdaq dividends have been growing, 11, 12, 13% per year. And they grew 33%.

I think it was in 2024. And so like how in the world would a dividend future on the Nasdaq grow that dramatically? Well, you had two big names out of the MAG-7 decide to pay a dividend. And so their impact on that value of that dividend future was really pretty remarkable. There's still some, some holdouts, if you will. But perhaps eventually all of those names or most of those names in the Nasdaq will pay dividends, which means we're buying that dividend future. If they decided to start paying dividends today, the value of that dividend future for the Nasdaq product would go up pretty dramatically.

Significant amount of fear. Like COVID would be a great year to sort of look at this. beginning of the year, the dividend futures had a price of X. COVID hit, the world was going to shut down. The dividend futures collapsed because everybody thought, oh my gosh, these guys are going to cut all their dividends and pull in their horns. By the end of 2020, the actual price of those dividend futures was up because everybody overreacted. So when you have a broad index, I think you get a little bit of a diversification play. there may be a company here or there that will suspend or cut a dividend, but by and large, companies don't like to do that because it's generally seen as a bad thing. And then it hurts their underlying stock price.

Another way to think about it is because we have a little bit lesser exposure to the S&P, you actually could increase your equity allocation a little bit by using QDPL as part of that solution, right? as you said earlier, I think one of the big timing things that makes this make sense today is that, yields are now 3% on the short end of the curve, right? We were able to get five or maybe even a little more than five and hide for a while, though those days are over. And now folks are starting to think now, what am I going to do? Like at 3% yield and if it's taxable, I get 1.8 and then inflation is 2.5 or 2.7. I'm losing money to inflation. I need a better source of

Return on my short-term positions. And so I think that the timeliness of this today is probably more pressing than it was when we launched it four years ago.

National independent broker dealers. And then anybody who's a pure RIA. So, maybe they were a breakaway from the firm and just decided they're not going to sell stuff. They're just going to charge for services. So, you have that group of people. And then we have an independent B channel that takes some of the smaller national broker dealers and the bank broker dealers and the insurance company broker dealers. So when you, when you try to get something going, you're not going to get it on a wire house platform right out of the gate. It's just not going to happen. You have to build a groundswell and you have to build the AUM up. And so those two second channels are where we do

That. An RIA can sell anything he or she wants. Most of the independent broker dealers have much more lenient requirements if you want to be available to their folks. And so we sort of use that second and third channel to sort of spur things along if you will. And that's always been our strategy. we, we, it's a high cost model for sure. Right. you have 120 salespeople. So, it's a big number, which is why people don't do it. We just always believed it was the best. And maybe that's because we came from the distribution side of the business. Joe and I, Joe Thompson and I are partners. And this is all we ever did. Right. So we were doing

It for somebody else. Now we're doing it for ourselves. And, I just don't think that, I don't think you can replace the value of building relationships and understanding, how somebody runs their business because they're all just a little different. And then working with that person to figure out how to solve a problem or to make their practice work more efficiently or to help them gather new assets from existing clients in some way or gather new households. So that's really sort of what we, we would sort of land on is that's the big difference here for us. And the other thing is that we're privately held. So like, if we want to launch something, if it doesn't go anywhere, it's our money we're burning.

So, and it, and the cost of launching products has gone down significantly as well. So we can leave stuff out there. Like we had a product that we launched an ETF ticker was SRVR. So it was like eight years ago. It was basically we wanted on the data center real estate play. This is eight years ago. Right. And the premise at the time was 5G instead of 4G, we wanted 5G, which was increased, needed increased computing power, blah, blah, blah. And then the cloud was still growing and streaming was growing. So we thought this is pretty timely. Well, today now it's all about AI and the data center side. Right. And that product has been, pretty successful. It struggled in a rising interest rate in market because, that's a real estate component. It's off to the races this

Year. And we just, we made a little change to it. We added a power sleeve because the big story around data centers is if you don't have behind the meter power, you're not going anywhere. You're just not going to get it from the grid. I don't think the regulators are going to let that happen. So you have to add those onsite power names. That's like, GE Vernova or some of the small nuke names. Generac is an example. Caterpillar. Well, so off of the success of that, we said, well, you know what makes the data center worth something is everything that's in it. The hardware, the software, the chips, the networking, the cybersecurity, the cooling systems. So we took everything out of the data center and put it in a pile and said, let's build an ETF out of that.

That ticker is traffic, TRFK. It sat and did very little for the first year and a half to two years. But since it's launched, it's averaged over 30% a year. So now money is coming in, probably because it's got a track record, probably because the track record's pretty good. And then also because it's a very timely story, which is the way we view it is you can be a spender or a receiver on AI, right? Either you can be the hyperscalers and you can make the bet. I'm going to build out the data centers and I want to own that piece of the business. I don't know what my returns are going to be yet. Or you can be the folks on the other side of that

Transaction, which is going to sell them all the equipment that goes into those data centers. And all those companies are already up and going and profitable. So we think that, that that's sort of how we think about things, right? So if traffic never went anywhere for five years, somewhere, somewhere down the line, it may be, it would build a long enough track record or the time in the market or the circumstances would change. And so, we, we are a little more patient perhaps than some people in terms of building products. We'll always build something as long as we think there's a real client need and an FA need. And lastly, if it's something that we would actually want to own ourselves, like we're not going to launch crazy stuff.

Yeah.

Creativity. Some of it's going to be bad creativity, but the, the things that are not better is that, the industry really relies upon the market makers and in particular their balance sheet when you're rebalancing funds and balance sheet is an infinite. And so, you better have a good reputation. You better, be the kind of ETF issuer that when you launch something, it grows and gets out of seed because the bank, the, the, the, the market makers, they, they seed new ETFs. Right. And so if it never raises any money, they're owning this particular ETF on their own balance sheet. And then, they got people that run treasury at their firm. They go like,

Well, what's that? Can we get rid of that? And there's no way to get rid of it. Um, so that's, that's probably, um, something that's going to have somewhat of an impact. Like I said, if you're, if you've been true to your word and you get people out of their seed and you, you run a lot of volume, um, then, you're in a better position. And if you were starting brand new today and saying, my lifelong dream was to be in the ETB business and I've built this awesome product and I just can't wait for people to find it and put money in

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