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Arrow's Chief Targets Active ETFs, Sub-advisory Agreements

Joe Barrato is chief executive officer of Arrow Investment Advisors, a developer and distributor of mutual funds that are built around "targeted" levels of risk.

Barrato is looking to guide his Olney, Md., firm into the creation of actively managed exchange-traded funds and into the market of providing subadvisory services to other fund companies, with new products and potential partnerships with ETF index providers. The Arrow Funds now have $650 million in holdings.

Money Management Executive recently asked Barrato, former director of product development at index and sector fund developer Rydex Investments, now part of Guggenheim Investments, to shoot straight about his growth plans for Arrow as well as on the burgeoning active ETF market.

How did your experience at Rydex influence the way you're managing Arrow?

There were a number of initiatives that we were doing there. One was building alternative strategies in mutual fund wrappers, buy-and-hold instruments in a mutual fund wrapper, and doing various things with variable annuities. One initiative that I got really excited and that got management excited was building a managed futures fund in a mutual fund wrapper.

There were a number of hurdles such as regulatory and management. The owner had passed away and there was definitely a changing of the guard on how initiatives happened and that was kind of what started driving me to think that I need to leave. We registered the product and they failed to initiate launching the product so myself and two other individuals (we were the core team in the business development group) decided to leave and create Arrow and our first endeavor was to build a managed futures fund.

What we try to do is build packaged and tactical solutions for advisors. That was a lesson that I learned deeply at Rydex, which is to try and build things that advisors can weave into their portfolios. I'm not trying to be everything to everybody; I'm trying to fill a niche.

I'm very happy that my product development days have helped me see ahead through those potential clouds in the horizon that could impact any products that we develop. Case in point would the Commodity Futures Trading Commission's potential rules on managed futures products.

What's your approach to the active ETF space?

Products have to have a theme that is needed in the marketplace. There has to be good support from a distribution perspective so the client base that we built up with our funds is going to be instrumental to us being able to position our products. But the key to an active strategy is how well they're priced and how well they're positioned to the marketplace. More importantly, the longer they have a track record, the more they'll be able to show how they highlight themselves over funds.

We filed for exemptive relief from the Investment Company Act for actively managed ETFs last fall and we got our exemption on July 3. We've looked to see where the potholes are in terms of where the SEC has been slowing the active filing. Obviously, the biggest one is derivatives so if you put derivatives in your filing, you're not going to get approval because they've made it pretty clear that they're not going to do that. My goal is to move through this as quickly as we can. If we can register something by the end of this month, we're hoping by early next year we can have a product out.

How else are you looking to grow the firm?

The area where we probably have the most needs is probably on the sale side. Earlier this year, we did hire Joe Cunningham to be our director of capital markets. He's going to be instrumental in helping us support the ETF business. We have aspirations to have someone build out our RIA team at some point in the near future. It takes a long time to find the right people who fit your culture. The other role we're looking for is a dedicated key accounts person at some point. We have someone in that role now (Day Thomas) but he's wearing dual hats.

We also created our own distributor called Archer Distributor, which will ultimately be the distributor for all of our funds.

With the ETF [business] we decided to partner with Gemini Fund Services so we're going to bring our product development skills to help them get into the ETF space.

If someone has an index but want to have it in a fund wrapper, we can be their adviser and they can use our exemptive order. I think you may see us be the adviser to other products.