Frazier Investment Uses ETFs in Barbell Strategies

Frazier Investment Management has made ETFs an integral part of the services it provides.

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Steve FrazierThis article is part of a new series from ETF.com highlighting financial advisors. 

 

Steve Frazier is the founder of Frazier Investment Management, a financial planning firm that caters primarily to entrepreneurs and business owners. The firm is a longtime user of exchange-traded funds, implementing them in portfolios for their tax and cost efficiency. Frazier spoke with ETF.com’s Heather Bell recently about his firm and how he uses ETFs.  

ETF.com: Please tell me about Frazier Investment Management. 

Steve Frazier: We focus primarily on entrepreneurs; [they are] 70% or 75% of our business. [Those are] people that have owned or sold a business. A lot of those are either family businesses or small firms—law firms, doctors, tech entrepreneurs. We serve about 250 families. 

We're in southern Rhode Island, which is becoming more of a hotbed of people that were working remotely and moved here from New York City and Boston during the pandemic. A lot of people stayed. That was a good thing for our business.  

ETF.com: How do ETFs figure into your practice? 

Frazier: We've been using ETFs as our primary source of investment vehicle since I started this firm. When I started in the business about 10 years ago, I saw it as the future, so it was a selling point. “ETFs are the modern mutual fund” was our idea, and the idea of tax efficiency was primarily the reason to use them.  

ETFs in general have really helped our practice differentiate, but they really helped us stay agile, through all the things going on. Clients do appreciate things like the tax efficiency and the transparency [they offer]. 

We've been a big proponent of using [ETFs] for fixed income for a long time. It's starting to really come into its own, if you will, in the ETF space. I’ve always been a big fan of the [target maturity] bond products [that can be used for laddering]. That’s been a great piece of our practice over the past 24-plus months, given all that's gone on with duration risk.  

ETF.com: Your firm implements ESG strategies. Do you use ETFs to do that? 

Frazier: Yes. I feel like [the product offerings] slowed a lot, given all the political things that have been going on. But it was something we used over the past couple years. Unfortunately, we've run into liquidity issues that caused tax problems.  

If you’re looking for ESG products, make sure there's enough liquidity that you don't run into either trading large blocks or having to sell out for capital gains. Even worse, there were a bunch of product closures there for a while. We've been happy to keep doing it. Many people ask—that’s for sure. 

ETF.com: So ESG is something you’re seeing demand for among your clients? 
Frazier: Yes, and I think it’s a little bit to do with demographics. I'm not getting a lot of those questions from clients in the Midwest, but we are from the New England client base. I just had a new client onboard last week that was adamant about it. 

ETF.com: Has there been any reaction from your clients regarding the recent backlash against ESG?  

Frazier: No. I explained this to somebody last week. We were doing a review in which we talked about [how] last year was not a great one for ESG [products], because they tend to be more technology heavy and more growth stock, less value stack, heavy in some of the indexes.  

They had outperformed for a couple of years before that. [The client] said they were willing to wait through [the performance] without investing in the things they didn't feel comfortable with. A lot of people are OK with pushing through that. 

ETF.com: What other types of ETFs do you look for to include in portfolios? 

Frazier: We tend to use barbell approaches with a lot of our investing in equity. ETFs give you an easy way to zero in on those particular barbells, in fixed income and in equities.  

A good example is using a value and a growth ETF as a barbell around a core portfolio. You build your typical total stock market portfolio and then we build with ETFs around that barbell of stocks and bonds.  

It allows us to focus or weight where we think the market’s going or to buy the underperforming side of the barbell, [and sell] the outperforming asset.  

This year has been an excellent example so far. If you would have sold your value stocks, which outperformed wildly, at the end of last year and bought growth right at the end of the year, growth stocks outperformed value by a wide margin so far in 2023.  

Is that going to continue? I don't know, but you could have taken your value. With the barbell approach, ETFs are by far the easiest way to do it, because what you own is so transparent. 

ETF.com: What’s important to you when you’re selecting an ETF? 
Frazier: Cost and liquidity. And obviously, track record. We try not to buy a new ETF.  

Liquidity is pretty important and size of the fund. We'd like to see 100,000 shares a day. I laugh at this a little bit, because I just remember when all of these were so new that there were plenty of them that would trade 1,000 shares a day. That was scary, and I just stopped buying them. 

ETF.com: What are you telling your clients in the current environment? 

Frazier: We think it's plausible that we have a positive return in stocks this year.  

However, it won't be a linear experience—we expect a choppy year, especially as we get further along into the second quarter. It’s just a matter of earnings revisions starting to come through and the real effects of interest rates—which take a long time to get through the system—actually [being] felt.  

We're also not heavily in the camp of “The world is ending! Recession is coming, and you should just give up!” The more people that say it, the more likely we feel that's not going to happen.  

One thing in this business I’ve learned is when everybody thinks the same thing, it’s probably wrong.  

I think there could be a tough moment in this year, but it doesn't mean we can't end positive as we start to look forward to what's next. Once the Federal Reserve decides to stop raising rates, which we expect at some point in the next couple of months, I think you start to turn a corner.  

There hasn't been a better time in 20 years, or arguably more, to be a fixed income investor. And if you have cash, it's been an incredible time to put that to work as it pertains to gaining yield and in generating some income.  

If you have cash sitting in the bank, either make sure that it’s earning between 3.5% and 4%. 

 

Contact Heather Bell at [email protected] 

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.

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