Michael Venuto's firm provides unique ETFs that have returned as much as 60% for investors this year. He breaks down his process — and shares the 'anomaly' investors need to watch today.

  • Toroso Asset Management develops unique, actively managed ETFs, and its four funds are up an average of 26% in 2020.
  • Cofounder, fund manager, and Chief Investment Officer Michael Venuto spoke to Business Insider about the firm's unique approach to market anomalies and what he's watching now.
  • He also shared his thoughts on investing as the pandemic and economic recovery continue to play out.
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Michael Venuto was living through any fund manager's worst nightmare: One of his biggest investments was plunging and nobody could figure out why.

The investment was Newmont Mining, a gold producer. And even when the price of gold trended up, the stock kept going down, losing about 20% of its value between September 2004 and May 2005. 

Eventually he landed on a key reason for the sell-off.

"State Street had launched GLD, the first-ever direct exposure to gold," Venuto told Business Insider in an exclusive interview. "That was an epiphany moment where the firm recognized that, regardless of whether or not we ever got into the ETF business, the world of ETFs was going to change investing. "

If experience is the best teacher, painful experiences might be the best of the best. Venuto and his employers started investing in ETF startups. Ultimately he struck out on his own and co-founded Toroso Asset Management in 2012. He's the firm's chief investment officer and manages one of its four funds.

"Toroso's original thesis was somebody needs to look at this ETF market and do security selection, go beyond what the name and expense ratio says, and really figure out what's in these things and where the anomalies are, where the mistakes are, how to make them better," he said.

That idea of anomalies — incredibly important numbers or market errors — is at the center of a lot of what Toroso does. The firm's ATAC Rotation Fund, for example, looks at a single indicator tracking the performance of utility stocks and Treasury bonds, and either goes 100% risk-on or 100% risk-off depending on what it says.

That fund, managed by Michael Gayed, is up 60% this year. Cumulatively, Toroso's funds posted an average return of 26% in 2020, as of August 14. That includes Venuto's Amplify Transformational Data Sharing ETF, which invests in blockchain-themed companies, which is up 28%.

From Venuto's point of view, the biggest investing anomaly in 2020 is an obvious one: The fact that the stock market and the economy have gone in dramatically different directions. But the most important one for him, and for investors, is a figure with a Halloween-themed name.

"This year we really focused on a new anomaly related to COVID that we call the zombie score," he said. The Toroso team created that measurement based on the vulnerability of different industries to the continuing effects of the pandemic. The 25 most threatened industries, like airlines and mall operators, get high scores.

The firm is steering clear of ETFs with high zombie scores, and Venuto warns investors that even if those companies survive, they might be very unhappy with the outcome. Like investors in many troubled companies during the 2008-09 Financial Crisis, they might end up watching their investments lose all their value.

"The Robinhood crew, the do-it-yourself investors that have poured money into jets or airline stocks and have made big gains," he said. "Taxpayers are unlikely to be okay with bailing out the shareholders … The shareholder is probably the last one holding the bag, and it didn't work out great for the shareholders of Lehman, GM, Ford, CIT Group, or any of those."

He advises investors to be wary about owning too many small- and mid-size company stocks, as those companies in general have higher zombie scores. He also cautions about "over-diversifying" and says it's a better idea to bet on best- and worst-case scenarios for the economy and the themes that matter the most.

"The way to go right now is to move towards active management, towards barbell-ing," he said. "Not over diversifying, but owning both the things that can do well in the good scenario and the things that can do well in the bad scenario and leaving that middle out."

He says that would include themes like telemedicine, work from home, e-sports, and the blockchain in a best-case recovery scenario, and gold and Treasuries if things go badly.

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