ETF Strategists Turn Beta Into Alpha

June 05, 2014

Andrew Gogerty, the former Morningstar analyst who compiled those data before he left the Chicago-based fund research firm, told ETF Report that while the growth rate is sure to tail off as assets in ETF model portfolios grow, the percentage of the ETF asset pie coming from ETF strategists will almost surely double in the next five years, and could even triple.

"If you think about the value that these strategies provide to a financial advisor or some type of intermediary as an outsourcing of functions of their day, it's very attractive," said Gogerty, who is now a vice president of investment strategies at Boston-based Newfound Research, an ETF strategist firm with about $20 billion in assets under advisement.

"If you look five years down the line, and predict that ETF managed portfolios will control anywhere from 10 to 20% of all ETF assets, I don't think that's unreasonable," said Gogerty.

Some advisors, such as Rick Ferri, president of Michigan-based Portfolio Solutions, aren't convinced the growth will materialize. Ferri, a pure indexer who hews to a straight-ahead "buy, hold and rebalance" approach to asset allocation, also questions the alpha generation that ETF strategists promise.

"There's no reason to believe that switching from picking stocks to picking ETFs is going to yield a better result," said Ferri.

Whether you agree with Ferri or not, if you're designing alpha-focused strategies, you'd be remiss if you didn't build the core of portfolios with cheap index ETFs, and complement that at the perimeter with more finely targeted or tilted ETF strategies and single securities.

From Insurgents To Apostles
The current rosy outlook for the ETF and for ETF strategists wasn't always a given.

In the early years after the first U.S. exchange-traded fund, the SPDR S&P 500 ETF (SPY | A-98), was brought to market in January 1993, there just weren't enough ETFs in existence to execute in any meaningful way the top-down global macro approach favored by ETF strategists.

But even a decade after SPY, with the arrival of the first batch of fixed-income strategies that made possible a credible attempt at rigorous asset allocation using ETFs, pioneering advisors who recognized the vast potential of the ETF were still bogged down educating prospects and clients.


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