ETFs are superior building blocks for advisors constructing diversified portfolios due to the financial products’ low costs, tax efficiency and indexed approach that active managers find difficult to beat over longer periods. So says the chief investment officer of a firm managing $12 billion using ETFs.

ETF Trends Editor Tom Lydon recently sat down with Windhaven Investment Management’s CIO, Steve Cucchiaro, to discuss why he likes ETFs and how he’s positioning portfolios as the U.S. fiscal cliff looms.

Windhaven started using ETFs in 1994 and the investment manager has grown rapidly since then. The firm was acquired by Charles Schwab (NYSE: SCHW) a couple years ago.

“My focus in the beginning was on asset classes. I knew the market was much more inefficient at the asset class level than the security level. Therefore you can add a lot more value if you can invest in asset classes,” Cucchiaro says, adding that the ETF structure was “by far the best way” to invest in broad areas of the market.

In terms of market outlook, he tells Lydon that there is a stalemate currently between deflationary and inflationary forces. Governments, corporations and individuals continue to deleverage and pay off debt. Meanwhile, central banks are launching stimulus measures on the inflation side of the equation.