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An Introduction to ETF Managed Portfolios

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in exchange-traded funds and represent one of the fastest-growing segments of the managed-account universe. Professional money managers are packaging portfolios of ETFs into investment strategies to meet a wide array of investor demands, and (thanks to the continual development of individual ETFs) they are providing access to both stand-alone investment strategies and one-stop, complete-solution offerings.
While the growth of ETF assets in recent years is not a new story, the emergence of ETF managed portfolios has been little discussed. However, as both the breadth and depth of the ETF market increases, the natural evolution is to develop total portfolio strategies utilizing ETFs as the primary investment vehicles. The adoption has come first from advisors and other institutional decision-makers, and has primarily been available in separate accounts and on portfolio overlay platforms, but not mutual funds.
Up until now, coverage of and education on the space has not kept pace with the universe's growth in recent years. In January 2012, Morningstar released a comprehensive landscape report on the industry (see here). Here are some growth highlights:
  • 370 strategies tracked as of Sept. 30, 2011, holding $27 billion in assets
  • 43% asset growth over the trailing year
  • 30% of the strategies were less than three years old
Growth in assets from increased advisor demand is being driven by multiple factors:
  • The fiduciary standard continues to move forward as the baseline philosophy for managing client portfolios.
  • Growth in the fee-based model is tilting portfolios toward lower-cost, broad-based investments for a larger part of client portfolios, with a focus on asset allocation.
  • ETF strategists allow advisors to access institutional-type diversification and portfolio management through outsourcing, allowing them to focus on gathering and retaining client assets and managing the overall financial profile.
Interest in Morningstar analysis of ETF managed portfolios has been tremendous. Morningstar adds new strategies to our ETF managed portfolio universe after assigning portfolio attributes, reviewing strategy objectives, and analyzing the portfolio holdings. Our database gives advisors the deepest, most-comprehensive information on ETF managed portfolios available for research and review for potential client portfolios.

We anticipate tracking more than 500 strategies representing $42 billion in strategy assets.

The next Solution Center presentation discusses Morningstar's framework for understanding a strategy's position within the broader ETF managed portfolio universe.

Morningstar's ETF managed portfolios Attribute Classification System gives advisors a new tool for conducting research on these strategies and offers clarity on potential exposures across the ETF universe. The system also provides a framework to discuss and analyze developments in the ETF managed portfolios universe.

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Additional Solutions

  1. ETF Managed Portfolio Attributes Part II: Portfolio Implementation and Primary ETF Exposure Type
  2. ETF Managed Portfolio Attributes Part I: Universe and Asset Breadth

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