ETF Portfolios: An Option To Endowments

November 18, 2014

Any investor can achieve the risk/return profile of sophisticated endowment funds with liquid, transparent and diversified ETFs.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF asset managers in the money management industry. Today's article is by Hafeez Esmail, San Francisco-based Main Management’s director of compliance.

The average wealthy investor simply can’t invest the way large college endowments can, in part because they don’t have access to the same vehicles. With a long-term time frame, endowments can afford to hold illiquid hard assets for extended periods of time.

Moreover, the elite institutions typically have access to the best and brightest managers, including those running hedge funds and private equity portfolios. But is it possible to replicate the risk/return profile of these sophisticated endowments using an all-ETF approach?

Let’s examine the performance of some of America’s best-known universities over the past seven years. This period covers the financial crisis of 2007-2009 and thus an important time frame to include in the analysis.

Let’s compare their results with an ETF asset management firm that is accessible to wealthy clients with more than $1 million in liquid net worth. You’ll excuse me for choosing two ETF portfolios designed and run by our firm, Main Management. But the reasons are more than self-serving.

Consider Main’s Buy Write strategy, a hedged approach to equity markets that incorporates option writing as a key component for reducing volatility; and the Main Active Sector Rotation strategy, a U.S. Equity Sector Rotation strategy based on fundamental analysis. Both strategies are liquid, transparent and diversified, and both happen to be very tax aware.


Can The Endowment Return Profile Be Replicated?

In many ways, the chart, on its face, speaks volumes.

Main’s BuyWrite Hedged Equity strategy performed ahead of roughly half of the Ivy-caliber schools. The BuyWrite strategy has the long-term risk/return characteristics of a 60 percent equity/40 percent fixed-income portfolio.

Although a direct comparison to an all-equity approach, like Main’s Active Sector Rotation Strategy, is probably unfair, it’s clear that adding more equity to the mix would enhance the merits of a transparent ETF approach.

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