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By Paul Justice, CFA | 09-20-2010 02:16 PM

Results-Based Investing with ETFs

By allowing active management of risk at low cost with tax efficiency, ETFs provide an important building block for outcome-based investing, says Russell Investments CIO Erik Ristuben.

Paul Justice: Thanks for joining us. I'm Paul Justice, director of North American ETF research at Morningstar coming to you live from the Morningstar ETF Invest Conference.

And now I'm joined by chief investment officer of Russell's Investment Strategies Division, Erik Ristuben. He's been with the firm for over 25 years and has some key viewpoints on how to use products.

Erik, thank you for joining me.

Erik Ristuben: Well, thanks for having me.

Justice: Well, I think it's interesting that you see a very bright future for exchange-traded funds. You have experience of reaching back to mutual funds, structured products, anything that's available to you. Can you explain, going forward how you plan to use ETFs?

Ristuben: Well, I think you look at the kind of what do they give you in the space when you're dealing with the retail investor. I mean there is obliviously tax efficiency and that's hugely attractive. There are lower costs and what they give you is the levers on cost and taxability and active risk; those are the levers that really somebody in my position wants to be able to utilize because I want a lot of options.

I want to be able to kind of embed the risks in the portfolio that I want and take out some of ones that I don't want. I want to do in a tax efficient manner, and if at all possible as cheap as I possibly can, and I think ETFs do a very nice job of kind of ticking the boxes for all three.

Justice: As a hands-on asset allocator, it seems to me like you need the flexibility that ETFs are going to bring to the table in order to get in and out of the positions that you're really seeking, but you're using what are inherently, they are passive vehicles to take an active approach to investing.

And where do you cross – I mean do you blend the two together, do you use ETFs as a building block, or do you use them more to do the tilts at the edges?

Ristuben: Well, I think we were looking at the utility, and right now I don't know if the ETF market has quite got the right product configuration for us, but we think that's where it is probably going to be going. And I think you think about them as building blocks and as we're kind of moving as an industry to outcomes and really focusing on outcomes, like is somebody going to have enough money to retire.

Justice: Sure.

Ristuben: I mean you think about that and then now it becomes kind of the return pattern. The characteristics of the returns of the individual pieces that they use and when they did do well, when they did do poorly, what risks they offset, what risks do they magnify. Those are the kinds of tools that you want to have available, particularly as you get close to retirement.

You definitely want less equities when you get closer to retirement, but you probably want different equities and different compositions, something that's got a little bit more downside protection element to it. And as you kind of look at ETFs, they're probably going to be really good fits for that kind of investment engineering in the light of the fact that people are beginning to look as investment success isn't beating the benchmark every year. It's actually, are they achieving the results? And these things will be hugely helpful in my opinion.

Justice: No, I agree. I think you made a good point earlier when you were talking about not being able to pay an electric bill is a very bad outcome.

Ristuben: It is.

Justice: And being able to pay and have a little bit extra, that satisfaction on the upside isn't nearly as great [as the problem caused by being a little bit short of a necessary amount].

Ristuben: Right.

Justice: And so, I think you're right that ETF development should go in the direction of delivering different types of risk metrics going forward, and hopefully we'll have this entire product suite evolve and which goes to show that there is plenty of room for ETF growth when you think about new concepts. I think we should expand upon that much more.

So, thank you for your insight.

Ristuben: Thank you.

Justice: And thank you for joining us. I'm Paul Justice from Morningstar at the ETF Conference, and thank you to Erik.

 

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