Using ETFs For High Net Worth Clients

July 27, 2015

True; everything has its place. Do you find ETFs appealing simply on a cost level, or do you see other benefits too? How do you feel about, say, their intraday liquidity or tax efficiency?

Low cost is primary to us, but what generally doesn't enter into it at all is liquidity. As long as I can get out at the end of the day, I don't really care if I can trade in the middle of the day, because most of the stuff we buy has high liquidity anyway. For example, for most of our bond allocation, we use Vanguard funds. You can get out of them at the end of the day, and that's good enough for us.

Roughly how many ETFs do you use?

It varies over time, but right now, I would say we have about six.

You mentioned SPY earlier. What are some other ETFs you use?

We use the SPDR S&P Insurance ETF (KIE | A-71) and the iShares U.S. Home Construction ETF (ITB | A-75). In particular, ITB is a great example of how we approach ETFs. We knew we wanted some housing exposure, but we didn't want to buy individual securities: We wanted diversification, because there's too much company-specific risk. Yet there really wasn't an active manager in the space. So we went to ITB.

What are your thoughts on actively managed ETFs? Are there any you're following right now?

We do like the AdvisorShares TrimTabs Float Shrink ETF (TTFS | C-82). When we first started researching the fund, it wasn't obvious to me that it would be tax efficient, because its turnover is relatively high, but it was. Plus, its expense ratio is comparable to that of any other active manager.

Also, because of the structure of an ETF, they tend not to have to distribute many capital gains to their shareholders. Look at TTFS' history; all they've distributed is dividends, whereas if this were a typical mutual fund, there's no doubt in my mind they would've had capital gains distributions by now. We like that. Personally, I wonder why all open-ended funds don't go to an exchange-traded-fund format.

Looking ahead, what are your expectations for the second half of the year, and has that affected which ETFs you hold?

Lately we've been reducing our domestic equity allocation and moving offshore. Typically we don't use ETFs in offshore markets because they're less efficient. We feel that the less efficient a market is, the more an active manager can outperform.

As far as U.S. assets are concerned, our theme is that rates will rise, eventually, and you're probably going to see some flattening of the yield curve. Of course, I've been saying that for several years now, and it's certainly taken a long time to get there!

Given that, we tend to shy away from the high-yield equities. We've been reducing equity income funds and things like that.

Generally speaking, however, we're positive on the economy. We think the likelihood of another recession in the next year or two is very small. Or so says our crystal ball.

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