Exchange traded funds provide an easy way to access various segments of the markets. Consequently, investment managers are taking a closer look at the tool as a way to craft portfolios entirely out of ETFs.
ETF managed portfolios are a growing segment of the separate accounts space, with $86 billion in assets as of the end of the third quarter, a 37% growth rate year-over-year, reports Conrad De Aenlle for the New York Times. [ETF Growth Themes: Strategists and Managed Portfolios]
The ETF managed portfolio space provides two main strategies: strategic and tactical portfolios. A strategical mix includes assets that are meant to provide incremental returns over the long haul, shifting only to adjust holdings. The tactical approach will show changes based on economic and market developments.
For instance, some tactical managers “tend to err on the side of caution during rallies and become more aggressive during declines,” Christine Benz, director of personal finance at Morningstar, said in the article.
However, within these two basic strategies there are many different individual styles as managers try to interpret the market.
“The devil is in the details when it comes to these products,” Benz added. “We see a great cross-section of strategies. It’s hard to paint them with a broad brush.”
Duncan Rolph, managing director of Miracle Mile Advisors, sees ETFs as the ideal vehicles for tactical allocations, with the growing number of ETFs. There are 1,561 U.S.-listed ETFs on the market with $1.6 trillion in assets under management.
“A tactical allocation strategy only works when you have underlying funds that you can easily, quickly rebalance in a cost-effective way,” Rolph said.
ETFs trade like stocks on an exchange, allowing investors to utilize the tool throughout normal trading hours.
Moreover, some managers argue that advisors are better off targeting asset classes rather than individual securities. [Augmenting Portfolios with ETF Managed Accounts]
“Markets are relatively micro-efficient and macro-inefficient,” Stephen J. Cucchiaro, chief investment officer of Windhaven Investment Management, a subsidiary of Charles Schwab, said in the article. “There’s more value in picking asset classes correctly than individual stocks. Maintaining a static portfolio of asset classes and picking individual securities is exactly the opposite of what you should do.”
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.