- 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.