An article published last year discussed the most successful ETF issuers over the last eight years. Avantis Investors, owned by American Century Investments, was singled out as a new entry that found fast success. However, there’s a new firm in the ETF arena that could trace a similar path — Rayliant Global Advisors.
Avantis has garnered around $60 billion in AUM in a short five years. What helped differentiate Avantis from other newer issuers that garnered assets quickly was that Avantis was not an effort by some trillion-dollars-plus giant financial behemoth, but instead a modest-sized mutual fund issuer.
How did they do it? Avantis created as a new investment unit under American Century, led by former senior executives from legendary quant shop Dimensional Fund Advisors (DFA). Avantis launched ETFs with similar characteristics to DFA’s products at a time when DFA did not offer ETFs. With successful execution marketing and distribution efforts, Avantis was able to attract tens of billions of dollars in net flows.
Rayliant, with its established, respectable quant experience, could repeat Avantis’ success.
The firm has a tangential connection to Research Affiliates (RA) and its RAFI family of factor indexes. Rayliant CEO and founder, Jason Hsu, was also a co-founder of Research Affiliates in 2002 and is a professor of finance at UCLA as well at several other major universities.
We recently sat down with Dr. Hsu to discuss Rayliant and Hsu’s ambitions for the firm.
A Conversation With Rayliant CEO & Founder Jason Hsu
Hyland: Jason, obviously Rob Arnott and yourself had massive success with RA and the RAFI indexes, which currently have $140 billion in AUM tied to them. What led you and your team to go off and create Rayliant?
Hsu: Research Affiliates is very much focused on U.S. large-cap with a focus on value factors. I became interested in emerging markets, Asia, international, and the opportunity for innovation overseas.
To cover those areas requires a much more varied approach than what you need to do in the U.S. Each market has its own challenges about data, accounting standards, what factors move a particular market compared to another, regulatory issues, and investor sentiments and behavior. It seemed clear to go overseas would really require a separate dedicated operation.
Hyland: What is another major difference between what RA does in the U.S. and what Rayliant does overseas?
Hsu: Tracking all these companies and markets overseas forces a massive technology requirement. We track upwards of 140 different factors — far more than what you would need to do in the U.S. That said, what RA did and does is part of the DNA of Rayliant.
Hyland: Was this new venture well-received when you and others left Research Affiliates?
Hsu: Yes. Five of us left RA to start Rayliant, and RA remained an important investor in Rayliant when we [launched] in 2016.
Hyland: How have things progressed since then?
Hsu: Not counting our U.S. ETFs, we have about $17 billion in AUM tied to our approach. About half or a bit more of that is firms using our index products, and a bit less of that is Rayliant actually being the subadvisor for overseas products.
For the products we have in places like Japan, China, Korea, or Hong Kong, we team up with firms who already have the distribution capabilities. The ETF markets overseas are not quite where they need to be for us to offer our own ETF brand in those markets.
Hyland: Let’s turn to the U.S. ETF market. You launched your first ETF four years ago. How do you view that effort at this time?
Hsu: Clearly the ETF wrapper is the chassis of the future for offering funds. We really view our efforts so far as a “walk, don’t run” approach. We have brought out a few more ETFs, and we are now reaching the point where our track record has been around long enough for investors to judge us.
Hyland: With these first few years behind you, and some very strong performance versus your benchmarks, do you expect to ramp up your activities in the U.S. ETF market?
Hsu: Now that we have three-plus years [in], we are in a better position to build distribution as well as deal with the various gatekeepers — at brokerage firms and elsewhere — who frequently want to see that amount of time with newer entries and approaches. We can also apply technology to help in this effort.
Hyland: You are obviously very familiar with the history and output of DFA and, in turn, Avantis. What are your thoughts about a comparison between where they are now and your firm?
Hsu: We clearly are aspirational to be like Avantis and drive growth. This could involve both organic and nonorganic growth. And, like Avantis, I think we need to be willing to consider some forms of tie-ups to move the process.
A key issue, however, is the strength in recent years of the S&P 500 and the reality of home market bias. Investors tend to overweight their own markets and really only seek diversification after a crash. But diversification is still really the only free lunch. Right now, we need to be realistic about how many good arguments, about international diversification, for example, are going to fall on deaf ears until the markets turn.
Hyland: Do you find a similar issue with European and Asian advisors or investors?
Hsu: No. We have a lot of non-U.S. investors, including major pension plans and national wealth funds, as clients. If you are a European advisor, you may still have a home market bias to your own markets but its performance is your frame of reference. Those returns have been weak on a relative basis in recent years. Your investments in the U.S. markets have performed well, but now you are overweight the U.S. Investing in emerging markets looks very attractive.
Hyland: Final question. Avantis is mostly focused on the U.S., whereas Rayliant is focused on international opportunities. In 2024, all of your ETFs had double-digit returns, but the S&P 500 was up 25%. Does that mean that if the S&P 500 rides high, you will not be able to readily repeat its success in the near term?
Hsu: I think this is largely correct. A big part of the equation will be the relative performance of the U.S. versus international. That might be 80% of the issue and we cannot control it. It does not currently favor us for rapid growth in AUM in the U.S., but markets turn. There will be another stage when international outperforms. Meanwhile, we need to focus on the 20% we can control: our own performance and getting in front of our U.S. audience.
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