What’s Your Go-To ETF?

• ARK Innovation ETF (ARKK)
• Freedom 100 Emerging Market ETF (FRDM)

I have two “go to” ETFs. The first is the ARK Innovation ETF (ARKK), which is actively managed but with a reasonable expense ratio and [the ETF] tax efficiency you wouldn’t get from a mutual fund.

When it comes to investing in megatrends or innovation, it can be easy for fund managers to lose discipline. ARK Invest employs Cathie Wood’s open research ecosystem. I believe ARK’s transparency and open research philosophy gives it an edge.

Further, their fund structure as an ETF is fairly unique for active fund managers who have historically opted for the less transparent mutual fund structure. A mutual fund need only report its holdings quarterly.

The ETF structure also gives an added tax-efficiency advantage [relative to the mutual fund structure] such that ARKK shouldn’t have to distribute large capital gains this year.

The whole category was revalued recently, but I’m with Cathie Wood in that you get to buy innovation at a cheaper price now. I want to make a bet on disruption, and I want it to be done with a lot of discipline and an ability to see through the noise—and she’s demonstrated that ability.

There’s no question in my mind that we’re in the early stages of the digital disruption in our economy, and you need to be exposed to it via a disciplined approach.

The second fund is the Freedom 100 Emerging Market ETF (FRDM), an emerging market ETF with a reasonable expense ratio and access to emerging markets while avoiding exposure to China and other countries where lack of freedom and human rights is an added risk, as has become all too clear recently.

The mandate of the fund is to provide exposure to emerging markets but by weighting the different countries based on their adherence to certain principles of human rights and freedom, and a wide range of other ESG criteria.

It gives you the chance to remove the sort of risk [we saw in China in August], where the government has wide latitude for human rights abuses but also with things like property rights. It’s a way to de-risk your emerging market exposure while also getting access to higher growth markets.

• Vanguard Total Stock Market ETF (VTI)

My clients for the most part have concentrated positions in their employers’ companies. I work exclusively with folks in the tech space, more specifically in the pre-IPO or newly public company space. In situations like that, one of the goals is to remove some of that concentration and be invested in a more diversified portfolio.

One of my go-to ETFs that plays a role in all of my clients’ portfolios is the Vanguard Total Stock Market ETF (VTI). For the most part, a lot of my clients are younger investors. At least part of their [objective] is to buy and hold, but because they’re younger, they may have an interest in investing in individual securities or have a thematic interest or have equity compensation [through their jobs], so VTI provides that diversification they need.

I’d say there are maybe five or six ETFs that make up the core portfolio, and then from there, we decide based on their goals—whether short-term or long-term—if we’re going to sell some company stock to invest in a more diversified portfolio, or whether we’d think of something a little more strategic and tactical.

Maybe 80% of their portfolio would be invested in those five or six core ETFs, and maybe the other 20% would be invested in their company stock, along with a few other individual securities or thematic plays. It depends on their goals, their risk tolerance, their time horizon and those sorts of things.

VTI, being a diverse, comprehensive and broad fund, gets the job done in terms of having exposure to different sectors. It’s a balanced fund with a healthy mix of small cap, midcap and blue chip stocks. It’s also highly efficient, with a low expense ratio. Those are all reasons I include it almost every client portfolio, including my own.

• Vanguard ESG U.S. Stock ETF (ESGV)

As long-term, asset-allocation-focused investors, we look for index funds or “passive” ETFs. We also have an environmental, social and governance (ESG) focus to our flagship investment program, so the plurality of our assets is in the Vanguard ESG U.S. Stock ETF (ESGV).

When selecting an ETF, in addition to the asset class exposure we’re seeking, we examine a number of factors. These include expense ratio, assets under management, daily liquidity, discount or premium to net asset value, adherence to benchmark and manager reputation. An interesting [but small or illiquid] fund isn’t helpful to our clients if we can’t trade it easily, because we could be half the daily volume.

The recent increase in ESG-focused ETF products has been very helpful for our investment program, but we’re cautious to wait for a new fund to gain traction before we consider it for client portfolios. ESGV is well-traded, diversified and very inexpensive: 0.12%.

We also like that it’s an all-cap mandate, because most ESG small cap funds are still pretty small at this point, so having more of that exposure in a more liquid ETF is helpful to us. And, of course, Vanguard is hard to beat for client focus and reputation.

• ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

If I needed to choose just one equity ETF for a client in today’s economic environment, I’d likely suggest the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). It seeks investment results that track the performance of the S&P 500 Dividend Aristocrats Index.

The S&P 500 Dividend Aristocrats Index is made up of high quality companies that have not just paid dividends but grown them for at least 25 consecutive years, with most doing so for 40 years or more. Often household names, NOBL’s holdings generally have had stable earnings, solid fundamentals and strong histories of profit and growth.

NOBL has a demonstrated history of weathering market turbulence over time by capturing most of the gains of rising markets and fewer of the losses in falling markets. iSectors research indicates that dividends provide a significant percentage of long-term returns and reduced volatility.

In addition, our study suggests that the best approach to selecting dividend-paying equities while avoiding the land mines (dividend-paying companies that go out of business or drastically cut dividends) is to choose companies with a long history of consecutive annual dividend increases.

These are primarily large, U.S.-based, multinational companies, but may include some small- and midcap companies as well. These U.S.-based global companies derive substantial revenues (~40%) from international and emerging market countries.

Therefore, it’s important to take this into consideration to avoid overallocation to international or emerging market ETFs. Also note that sticking with U.S.-based stocks reduces exchange rate risk for U.S. citizens.

• Vanguard Total World Stock Index Fund (VT)
• iShares MSCI Global Multifactor ETF (ACWF)
• Davis Select Worldwide ETF (DWLD)

The question I usually get is what my favorite ETF is for the next six or 12 months. But this question gets to the heart of managing an investment portfolio or strategy. To answer this, it really depends on the portfolio an investor or advisor wants me to build and how many different ETFs I can use.

If I’m building a simple, balanced, multi-asset portfolio, it only has a handful of names in it, and comprises key asset classes such as domestic equity, international equity, domestic fixed income, global credit, absolute return and real assets. Given this, I’m going to focus on an ETF that will get the lion’s share of the portfolio weight for a long-term, growth-oriented investor: a global equity ETF. 

We like to categorize funds and strategies into three investment mandates. First are beta exposures that provide market exposure at a low cost. For this, the global equity ETF I would use would be the Vanguard Total World Stock Index Fund (VT). It’s low cost and the most comprehensive in terms of number of holdings.

The second mandate we categorize funds and strategies for is “active” investment management. For an active global equity ETF, I like to look at both smart beta (which combines both passive and active management elements) and pure active management.

For a smart beta ETF, the iShares MSCI Global Multifactor ETF (ACWF) is a strong choice. Where it gets the most interesting is the area of genuine actively managed global equity ETFs. In short, all of the great active investment management firms are getting into ETFs and will be bringing out some solid options, and some have already. One that I like is the Davis Select Worldwide ETF (DWLD).