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By Andrew Gogerty | 06-21-2012 04:30 PM

3 Methods of Evaluating ETFs

Windhaven's Eric Biegeleisen discusses his firm's broad approach to ETF selection and its focus on the tracking, trading, and structural aspects of such funds.

Andrew Gogerty: Good afternoon. This is Andrew Gogerty from Morningstar, and we're coming to you from the 2012 Morningstar Investment Conference. ETF managed portfolios represent one of the fastest-growing areas of the managed account space, and joining me today for perspective on this growing trend is Eric Biegeleisen, the director of research for Windhaven Investments.

Eric, thank you for joining me.

Eric Biegeleisen: Thank you for having me.

Gogerty: So, Morningstar is defining managed portfolios as investment strategies with more than 50% in ETFs. Windhaven is 100% ETFs; that's all you use in your strategies. This trend in assets and demand from advisors has really picked up in recent years. As one of the biggest players in this space, what's kind of your perspective or what do you think is driving kind of this change in advisor demand over the last few years? What are they looking at that Windhaven and your competitors are offering that's becoming attractive?

Biegeleisen: Sure. I think, a large part of it has to do with just the growth of ETFs. They're easy to use, they are efficient, and they provide cheap access to a wide variety of asset classes making portfolio construction easier than ever. A lot of people view ETFs, including ourselves, as building blocks, rather than portfolio solutions.

Whereas mutual funds can maybe play both roles, ETFs really focused in on being tools to build up asset class exposures and combining an entire portfolio construct. Within that we're able to provide both a core or strategic asset allocation, in addition to a tactical asset allocation. When we combine both of these, we get our entire portfolio.

Gogerty: So you had mentioned the core and satellite part of Windhaven's process. Let's delve into that a little bit. You have three strategies with different levels of perceived risk in the name aggressive, moderate, and conservative. How does a core, and maybe a more tactical sleeve mesh together here? What are you trying to accomplish by having two inside a portfolio, but you like putting them together in one solution?

Biegeleisen: We offer three globally diversified asset-allocation portfolios. They are called diversified conservative, diversified growth, and diversified aggressive. Each is provided in separately managed account format. We don't utilize any inverse or leveraged products doing this.

Each has an element of equities, fixed income, hard assets, including commodities, gold, real estate, and currencies across the U.S., international developed, as well as emerging markets. This wide variety of asset classes provides us the ability to not only participate in economic prosperous times, were equities outperform, but also protect against downside risks such as those like say a credit contraction or a debt deflation or a geopolitical uncertainty.

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