Practical guidelines start with asking the right questions, not the easy ones.
Advisors and registered investment advisors continue to embrace ETF managed portfolios within managed accounts. These strategies typically invest more than 50% of the portfolio in exchange-traded funds, and many use active allocation. As of the end of 2012, Morningstar tracked $63 billion in assets from 530 different strategies. Collective assets grew 60% last year thanks to increased demand and distribution into the advisor and broker/dealer communities. As more investors consider ETF managed portfolios, there’s more need to define terms such as “global tactical asset allocation” and “ETF strategist,” as well as develop standards for selecting strategies for client portfolios.
Don’t waste time trying to decipher the nomenclatures for firms; they’re largely irrelevant. Paying attention to what a portfolio does over time is more important than understanding the way the industry has labeled the firms or even the strategies offered.
Advisors and other gatekeepers can evaluate the firms offering the strategies as they would any traditional boutique asset manager. For example, Sage Advisory is one of the most prominent firms in the ETF managed portfolio universe. But calling the firm an “ETF strategist” is too narrow. The firm offers a target-date series (utilizing ETFs), a series of stand-alone ETF managed portfolios, as well as a suite of traditional institutional fixed-income strategies. Both asset managers and their ETF managed portfolio strategies should be held to the same standards of research, analysis, and selection as traditional separate-account managers and investment products.
To evaluate a firm’s portfolios, look inside and answer two main questions: “What does the strategy practically do?” and “What is its potential role in a portfolio?” These answers will clarify the value proposition of a particular strategy. It’s important to study how a strategy has evolved and determine whether it’s a total portfolio solution or whether it includes tactical changes. For example, if a strategy says its aim is “global tactical asset allocation,” then determine where in the globe it’s investing, what types of assets it holds, and how often it makes changes to country, sector, and asset-class weights. After a pragmatic, systematic study, you should be able to answer the most important question: “Does this strategy effectively meet the client’s goal?”
In this series, we’ll outline a set of considerations for evaluating the key aspects of an ETF managed portfolio strategy. The series will focus on the following topics:
Additional research will focus on topics such as proper benchmark construction, performance analysis, and trading and execution developments.
All sound research processes start with a look in the mirror. Ask yourself, “Why am I adding an ETF managed portfolio to my client’s account, and why now?” ETF managed portfolios don’t belong in every client account. These strategies, with their potentially low relative number of holdings, makes them strong candidates for pairing inside a unified managed account or portfolio overlay platform, but the same could be said for a do-it-yourself portfolio constructed with a small handful of broad-based ETFs. These technology platforms are an efficient means of delivering portfolio strategies and lend themselves to ETFs and other exchange-traded vehicles, but they have some potential drawbacks.
Know Your Role