Jos Schmitt is one of the founders and President & CEO of the NEO Exchange, a stock exchange he formed with the support of a number of blue chip financial institutions.
Jobs in ETFs sat down with Jos in advance of the upcoming ETFGI Global ETFs Insights Summit at the St. Regis in Toronto to discuss his NEO, how we would change the ETF landscape for the better, future trends and work-life balance.
I saw an opportunity to do something different and believed in its commercial success – a stock exchange doing what is right for the investor and the capital raiser, so I co-founded NEO. This is the entire philosophy behind NEO, and it has taken my experience from a lifetime of setting up, advising and leading exchanges across the globe to turn it into something that we now know works. NEO is the icing on the cake of my career.
Jobs in ETFs: Tell us about yourself and your professional experience. Why the passion for exchanges and your path to co-founding NEO?
Jos Schmitt: My entire career has revolved around the exchange world, starting on a project with Accenture (Arthur Andersen Consulting back then) replacing an exchange trading floor with an electronic trading platform. This was followed by work on the design of a new derivatives exchange and clearing house in Brussels, where I was afterwards given the CEO role as a young and inexperienced 28-year-old, but with an incredible passion and curiosity for exchange vehicles. Those vehicles that allow investors, seeking to build financial wellness, to pass on capital to entrepreneurs, seeking to build companies. The combination of the two leads to a virtuous cycle allowing to grow businesses, create more jobs, generate more wealth, and continuously grow the economy to the benefit of the society as a whole.
Things changed when stock exchanges became for profit organizations and started to focus on their own shareholders rather than the investors and entrepreneurs they are supposed to service. I saw the core values driving stock exchanges disappear in favour of making as much money as possible for themselves, translating into allowing and even enabling unfairness in the market by privileging certain types of market participants over others, translating into pushing companies to go public even if it is not the right thing to do for the company or the investors, and translating into charging exorbitant fees for market data. Combine that with a quasi-monopoly situation and the losers are everyone else, as well as innovation.
I saw an opportunity to do something different and believed in its commercial success – a stock exchange doing what is right for the investor and the capital raiser, so I co-founded NEO. This is the entire philosophy behind NEO, and it has taken my experience from a lifetime of setting up, advising and leading exchanges across the globe to turn it into something that we now know works. NEO is the icing on the cake of my career.
JiE: Tell us about your biggest challenge and how you navigated it.
JS: Disruption meeting skepticism. When you want to do things in a different way, regardless of how laudable your intentions are, you always face people who prefer the status quo. Skepticism and that lack of desire to embrace change is often what I have faced as the biggest challenge.
At NEO our first trades, our first listings, and I can go on, were very difficult to unlock, but once you start to get traction, things change. You do need however to identify the early adopters who share your beliefs and who think that disruption for the better is worth taking a risk.
If you have a good value proposition and a good go-to-market strategy, combined with passion and perseverance, you will get there.
JiE: What advice would you give to those starting out in the industry now?
JS: Be curious, be passionate, work hard, and also be able, when required, to be patient. Try to grab the right opportunities that pass by and don’t be afraid to fail.
Curiosity makes you better and enables your personal growth. It will also impress people around you and allow you to identify what you are most passionate about.
You won’t necessarily know immediately what’s going to be your passion – I had no idea when I started my career that the exchange business would be where I wanted to be. I had the patience to figure it out.
Without hard work and commitment to what you do, don’t expect success. If things are not going exactly the way you want them to go, again be patient. You need to discover, learn, appreciate and understand how work works and what makes success.
Finally, pay attention to the opportunities around you. We all have opportunities but most of us miss them, ignore them or are afraid of them. Once you see an opportunity and feel that it is something that really fits you, be willing to take a risk and go after it. Failing is not a bad thing, in fact you learn so much more from failure than success, and it sets you up in an even better way for your future successes.
JiE: Is there something you enjoy most within the day to day?
JS: It’s a combination of things but what I enjoy most is the creative process – observing, listening and identifying pain points or opportunities, and then addressing them with new, different and often disruptive solutions.
And an organization can never have too many ideas – out of ten ideas you’re lucky if there’s one that is going to lead to something. Idea generation is extremely important, and I enjoy that but also the rigorous process of killing ideas and only progressing the ones that can lead to something.
NEO is a stock exchange at its core – we support listings, trading, and market data distribution, those are the business lines that retain most of our attention, but we are always looking for new opportunities. This led for instance to the launch of a distribution platform, called NEO Connect, for financial assets that are not listed on an exchange. We started leveraging it for public and private mutual funds, we call these platform traded funds or PTFs, and are now expanding it into supporting private corporates.
We are working on quite a few other ideas. You’ll soon see other interesting initiatives emerging from NEO going far beyond the classical stock exchange business, but always centered on that mission of allowing investors and capital raisers to meet each other in the most efficient way possible.
JiE: Can you tell us a little bit about how Canadian institutional investors are using ETFs?
JS: Trends in Canada are similar to what we see in the rest of the world where the use of ETFs keeps growing because of how efficient they are in providing the right exposure in consideration of the core drivers of returns – macro factors such as the business cycle, inflation, etc. and style factors such as value, momentum, etc. Once, based on your assessment of those factors, you have defined what you believe the right portfolio is, ETFs can be leveraged for the core allocation, tactical adjustments, international diversification, rebalancing, etc. No need to worry about all the individual underlying assets, as ETFs will give you the same results and at a very low cost. If you want to generate additional Alpha on top of that, you need to start zooming in on individual securities, countries, etc. but you better be pretty skilled at it.
While having experienced substantial growth, in Canada there is still a lot of room for more. The first ETF may have been launched in Canada but if you just look at ETFs AUM in Canada vs the US it’s roughly $150 Bn in Canada compared to over $4 Trn in the US – far from the 1:10 ratio that we like to use in terms of relative comparisons between these two countries.
JiE: What trends will define the next few years for the ETF industry?
JS: Beside further growth in the products that are available today, we’re going to see new types of ETFs emerging and becoming part of the mainstream. Think about actively managed ETFs, something that we have seen developing in the Canadian market and can be expected to take off in the US subsequent to some of the regulatory changes around disclosure. Think about ETFs on liquid alternative assets. Under the current macro climate, investment managers are looking for exposure to alternative uncorrelated assets and having those accessible under an efficient ETF wrapper seems like a promising proposal. I see a lot of potential for additional growth there.
JiE: If you had a superpower, what one thing would you change in the ETF industry?
JS: We’ve been at it for 30 years now and there’s still an incredible need for education. A good example is that investors often don’t understand that the liquidity of the ETF is not driven by the volume that you see in the ETF – it’s driven by the liquidity of the assets on which it is based. If I had a magic wand, I would make everyone understand the products, their benefits, how they work and what you need to look at when you want to leverage them and invest in them. So many more opportunities could be unleashed if there was a better understanding of how ETFs work.
In Canada, we have an additional issue which is quite appalling. Like in many other countries across the globe, trading of Canadian listed securities, including ETFs, is spread across a multitude of different marketplaces – we have 14 now to be compared with over 50 marketplaces in the US. What we don’t have in Canada is a mandated consolidated quote i.e. the vast majority of retail investors – close to 100%, and financial advisors – close to 95%, don’t see the full volume traded and full bid and ask spread in Canadian listed securities. They only see the volume and bid and ask spread of the listing exchange, meaning that on average they miss 60-70% of the full picture, if not worse. This leads to uninformed investors, quality of execution challenges, major disruption if the listing venue has a technology issue and listed issuers, including ETF providers, being unable to properly benefit from showcasing the real activity in their security when they discuss investment opportunities.
In the US this issue was tackled in the late 1970s!
We’ve been working and fighting for a consolidated quote solution through multiple channels and I hope we will resolve it one day. It’s quite fascinating that in 2019 Canada is still facing an issue of this nature. I would fix it tomorrow if I could, as it would benefit investors, capital-raisers and take us out of the dark ages.
JiE: You’ll be speaking at the upcoming ETFGI Global ETFs Insights Summit in Toronto on December 2nd at St. Regis. Tell us about your session without giving it away.
JS: While acknowledging the benefits of ETFs and the fact that there’s still enormous potential for growth in the Canadian marketplace, we need to understand what elements are hindering their growth and develop answers.
We’ll be discussing trade fragmentation, consolidated market data, internalization, exchange fee models and so on.
JiE: Staying happy and positive at work, are there any secrets you can share?
JS: If you’re passionate about what you do, it makes everything enjoyable. It doesn’t make every day an easy day, but it makes them all enjoyable. Having a solid team is critical in achieving that too. A high quality and committed team you can rely upon, a team that you enjoy working with. Let’s not forget, that team is your family during the working part of the day.
JiE: What is work-life balance for you and how do you achieve it?
JS: Being involved in entrepreneurial initiatives takes time and focus. Balancing that with your family life comes down not to the amount of time but the quality of the time that you spend together with your family. As an example, we have no TV at home – the time that we are together is time that we truly spend together, being very engaged with each other. External activities, we always do together. Just like you need to have passion at work, you need to have passion at home.
JiE: Tell us a little bit about your involvement with the WE charity?
JS: I was exposed to WE about 10 years ago – it started in Canada but it’s a pretty global organization now. WE seeks to lift people out of poverty, in underdeveloped areas/communities across the world, through five pillars: access to food, access to water, access to health, education and providing economic opportunity. It’s all about helping people to help themselves in a sustainable fashion, just like Mao said – don’t give them fish, but teach them how to fish.
We engaged with them initially on a project in rural Kenya to help develop those 5 pillars, including a primary school to realize the education component. Then we continued by supporting the establishment of a secondary school. Now we are at the next stage where we are supporting the setting up of a business school. You can see the path to not only sustainability but also future growth, giving the local communities not only a better life experience but the opportunity to have dreams. We love that vision and the strategy to achieve it.
The people behind WE are incredibly passionate about what they do, you can’t miss that. They work hard, are creative and lack no perseverance in fulfilling their vision. Combining that attitude with a vision that we truly share is what got us – myself, my family, my friends and organizations close to us – to support them.
Once the business school is ready, I hope we’re going to see some initial entrepreneurs emerging and maybe we can add some value there!
