The ETF Strategist business has grown around the false promise of market-timing and phony back-tests. But the market of unsophisticated investors has seemingly reached its limit. It’s time for the industry to adopt traditional institutional consultant style investment disciplines. While we go quarter to quarter stepping over the bodies of our colleagues whose strategies “blew up”, we fail to address the root-cause of our industry’s lack of growth; that we need to be better stewards of other people’s money.
Proper portfolio management from an ETF strategist should mirror the institutional consultant style of investing combining strategic and tactical elements. At its core, every strategy should have a written investment policy statement with strategic asset allocation targets. The targets should be based on the investor’s time horizon and tolerance for volatility.
Next, a strategy should have tactical ranges by asset class and category wherein the manager is permitted to make modest tactical adjustments.
Finally, a strategy should have an opportunistic element whereby the manager can take advantage of market opportunities or dislocations. This is the very successful institutional consultant model of portfolio construction used by many the world’s largest and most sophisticated investment pools. Because ETFs have given us the opportunity to implement such techniques, we have the opportunity to fulfill the promise of the separate account industry by bringing institutional caliber investment management to the retail investor.
Asset allocation is not religion or politics. Let’s make asset allocation great again!