Considering the rapid expansion in the number of exchange traded funds available, the sparsely populated ETF managed portfolios space could be the next big thing. With more options available, advisors are beginning to look to these managed accounts as logical choices.
ETF managed portfolios are separately managed accounts with over half their assets allocated in ETF products. About 100 new portfolios have been created over the past three years, with assets rising vaulting 43% to between $40 billion and $100 billion over the 12 months prior to September, 2011, reports Diana Britton for Registered Rep. [Why Managed ETF Portfolios are Hot]
Brokerage platforms, like Charles Schwab and TD Ameritrade, have reported a growing RIA assets flowing into these strategies over the past year. Ken Courtney, senior manager of the managed accounts solutions group at TD Ameritrade, notes that RIAs want to expand their portfolios with tactical ETF strategies to generate more alpha. Additionally, Morningstar notes that these portfolios are highly liquid, low-cost and tax-efficient ways to get broad exposure to many asset classes
However, with a relative short 3-year life span, most portfolios remain untested. Investors seeking to test a portfolio’s muster, though, may like to know that Morningstar is following 370 portfolios with $27 billion in assets.
“Whenever you think you can have it all, there’s going to be abuses in a situation like that, and I think that’s what happened with ETF managed portfolios, and that’s why Morningstar’s monitoring it,” Christian Magoon, CEO of Magoon Capital, said in the article.
Still, the critics argue that there is little reliable performance data, advisors may be profiting from low-cost ETFs at the expense of clients and actively managed ETFs defeat the purpose of low-cost, passively managed Indexing tools.
“They (the RIAs) could just go out and buy ETFs for their clients, right?” David Lindenbaum, vice president, managed accounts and alternative investments, Charles Schwab & Co., said. “They’re going to have to justify in their minds why they’re going to bring this other party in who’s going to get paid between 50 and 100 basis points.”