Financial Advisors Can Look to ETF Model Portfolios to Weather Volatility

Exchange traded fund model portfolio strategies can help financial advisors add operational efficiency and elevate the client experience.

In the recent webcast, Using Model Portfolios to Weather Volatility, Daniel Farley, Global Chief Investment Officer – Investment Solutions Group, State Street Global Advisors, outlined the current market we find ourselves in today. State Street anticipates a three-month peak event for the ongoing coronavirus pandemic that drags the economy into a recession. Looking ahead, Farley highlighted potential turning points, notably improving health data as the most important signal, followed by relaxation of lockdown measures. Both signals will precede macro data but will likely be sufficient directional indicators for the market to respond. Looking further out, we may see a gradual resumption of activity toward the latter part of Q2 to support a strong sequential rebound in Q3.

Brie Williams, Head of Practice Management, State Street Global Advisors, also underscored the growing defensive nature of investors as many become less optimistic about our current uncertain trajectory. For instance, 88% of investors held an optimistic financial outlook at the end of 2019, but the percentage has fallen to 77% as of the end of April. Optimism over the country’s economic outlook has also declined to 27% as of the end of April from 47% at the end of 2019, while comfort with the highs and lows of financial markets has fallen to 33% from 49%.

As a way to better navigate the current market environment, some financial advisors are looking into ETF model portfolios or separately managed accounts to streamline their businesses and to better engage with clients. Investors have also recognized the merits of model portfolios, pointing to benefits like a portfolio is being constructed by asset managers with more knowledge of the markets, an advisor can focus on what really matters to me, a portfolio has a track record that fits my risk tolerance, an advisor can spend more time helping me make more intelligent financial planning decisions, and an advisor can be more flexible to my needs, among others.

David Marshall, ETF Model Portfolio Strategist, State Street Global Advisors, argued that financial advisors have incurred opportunity costs that can be mitigated through model portfolios. For instance, financial advisors would typically spend time on crafting strategies, research securities, developing models, trading portfolios, monitoring portfolios, assessing risk, and rationalizing markets. Consequently, they are left with less time with clients, sacrifice differentiation, exposed to slower business growth, and do not address client needs. The average financial advisor would spend 23% of their time on portfolio management, which may be better served elsewhere.

As financial advisors consider a model portfolio to enhance their businesses, it is also important to identify key traits of the model provider. Marshall argued that advisors should understand and evaluate the total value proposition and the integrated components of a model portfolio. Moreover, the investment process should be a systematic process that is best suited for capturing the market inefficiencies that occur over time due to temporary security mispricings.

State Street offers a range of ETF model portfolios, crafted by experts with each one designed and managed by the Investment Solutions Group. The strategies are backed by more than 50 portfolio managers, strategists, and analysts, covering a range of investment outcomes to provide diversification opportunities across a variety of asset classes and risk profiles.

For example, the Strategic Asset Allocation Portfolios pursue optimal capital efficiency over a long-term horizon.

The Strategic Opportunities ETF Model Portfolios seek to capture deviations in return profiles over an intermediate-term horizon.

The State Street Active Asset Allocation ETF Portfolios seek to capitalize on short- and long-term mispricing in the global equity and fixed income markets by overweighting asset classes that appear attractive and underweighting less attractive asset classes.

They also provide Outcome-Based ETF Portfolios that solve for a range of investor needs and desired outcomes, such as the State Street Global Allocation Target Risk ETF Portfolio, State Street US Equity Sector Rotation Target Risk ETF Portfolio, State Street Flexible Allocation ETF Portfolio and State Street Income Allocation ETF Portfolio.

Lastly, there is a Specialized ETF Portfolio that pursues targeted objectives with sophisticated strategies. The State Street Multi-Asset Real Return ETF Portfolio seeks to provide thoughtful exposure to real assets, diversification, and additional return by using State Street Global Advisors’ tactical asset allocation process to drive active positioning.

Financial advisors who are interested in learning more about model portfolios can watch the webcast here on demand.